POS’s 9MFY23 results disappointed on poor cost containment. The deteriorating operating environment at its postal segment and logistics services negated the recovery at its aviation services. We widen our FY23-24F net loss forecasts by 17% and 10%, respectively, reduce our TP by 3% to RM0.38 (from RM0.39) and maintain our UNDERPERFORM call.

POS’s 9MFY23 core net loss of RM76.7m came in wider than expectations, at 89% of both our full-year net loss forecast and the full-year consensus loss estimate. The key variance against our forecast came from its inability to contain operating expenses.

YoY, POS’s 9MFY23 revenue fell 6%, dragged by waning demand for its postal service (-14%) and logistics services (-2%), mitigated by the recovery in aviation (+14%), and others services (+35%).

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

Meanwhile, its logistics sales recovered in 1Q with the upliftment of the coal export ban imposed by Indonesian government since Jan 2022, but demand had since dwindled. Meanwhile, its aviation sales continued to recover on re-opening of international borders especially the re-activation of umrah charter flights which drove in-flight catering higher.

All in, its 9MFY23 core net loss widened by 34%.

QoQ, POS’s 3QFY23 revenue decreased marginally as the recovery in postal services (+2%), and aviation (+3%) from economies re-opening, was offset by weak top lines from logistics services (-6%) and other services (-14%) weighed down by unfavourable business environment. Its core net loss widened by 39% on higher operating cost.

Forecasts. We widen our net loss forecast for FY23 and FY24 by 17% and 10%, respectively, to account for higher operating cost.

We reduce our DCF-derived TP by 3% to RM0.38 from RM0.39 based on a discount rate equivalent to a WACC of 6.2% 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. While we applaud its recent venture into “POS Shop” convenience stores through transforming its existing POS stores (currently 2 stores, target of 9 stores for FY23 and 50 stores for FY24), we are concerned on the gestation period of the stores to achieve operational efficiency.

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 - 23 Nov 2023