POS’s 1HFY23 results disappointed as the continued deterioration in its postal segment negated the recovery in its aviation and logistics services units. We widen our FY23-24F net loss forecasts by 19%- 124%, reduce our TP by 7% to RM0.39 (WACC: 6.5%; TG: 0%) from RM0.42, and maintain our UNDERPERFORM call.

POS’s 1HFY23 core net loss of RM47.5m came in wider than expectations, at 66% and 59% of our full-year net loss forecast and the full-year consensus loss estimate, respectively. The key variance against our forecast came from steeper-than-expected deterioration of its postal business and courier volume (as competitors undercut while e-commerce players accelerated the in-sourcing of their delivery function).

YoY, POS’s 1HFY23 revenue fell 5%, dragged by waning demand for its postal service (-16%), mitigated by the recovery in logistics services (+7%), aviation (+17%), and others services (+35%).

Its postal sales continued to be affected by the shifting of purchasing trend from online shopping back to bricks-and-mortar, worsened by lower demand from major e-commerce players shifting towards internal delivery capabilities (i.e. Shopee shifting toward its own Shopee Express).

Meanwhile, its logistics sales recovered in 1QFY23 with the upliftment of the coal export ban imposed by Indonesian government in January 2022, but fell short on demand for 2QFY23. Whereas, its aviation sales recovered on re-opening of international borders especially the re-activation of umrah charter flights which drove in-flight catering higher.

Consequentially, 1HFY23 core net loss was higher at RM47.5m (+24%).

QoQ, POS’s 2QFY23 revenue decreased by 4% with weak growth across the board except for aviation (+7%), on re-opening of economies, especially China. Specifically, postal service (-4%), logistics (-11%), and others services (-3%) were dragged by unfavourable business environment. However, 2QFY23 core net loss narrowed by 20% on better cost absorption.

Forecasts. We widen our net loss forecast for FY23 and FY24 by 19% and 124%, respectively, to account for the deterioration in its postal business.

We reduce our DCF-derived TP by 7% to RM0.39 from RM0.42 based on a discount rate equivalent to a WACC of 6.5% and a terminal growth rate of 0%. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4). Maintain UNDERPERFORM.

We are cautious on POS due to: (i) its struggling conventional mail business which is trying to stay relevant in the digital age, and we doubt that we have seen the bottom, (ii) its declining courier volume as incumbent POS has to face tremendous competition from new players such as J&T Express and Ninja Van that undercut aggressively on rates to grow their market share, and (iii) its cost-cutting measures being insufficient to counter its weakening core business revenue.

Risks to our call include: (i) the privatisation of POS at a premium over the market price, (ii) the return of profitability as cost rationalisation efforts finally pay off, and (iii) POS emerging stronger post the consolidation of the courier service segment after weak players are eliminated.

Source: Kenanga Research - 24 Aug 2023