POS’s 1QFY24 results met expectations. Its 1QFY24 core net loss narrowed 22% YoY driven by some one-time postal services rendered to the government. We are positive on its disposal of a shipping-related unit for RM123.2m cash. However, its conventional mail business will continue to struggle in the digital age. We maintain our forecasts, TP of RM0.33 and UNDERPERFORM call.

POS’s 1QFY24 core net loss met our expectation at 23% of our full- year net loss forecast. There is insufficient research coverage by the market to form a consensus estimate.

YoY, POS’s 1QFY24 revenue rose 2% with increase in demand for its postal service (+4%) and aviation (+34%), partially offset by weaker showing from logistics services (-28%).

Its postal sales received a one-time boost from postal services rendered to a government agency, which cushioned the slowdown in online shopping and lower demand from major e-commerce players that were investing in their in-house delivery capabilities (for instance, Shopee Express of Shopee).

Meanwhile, its aviation sales continued to recover on the back of the booming air freight sector coupled with the resumption of umrah charter flights (which also boosted in-flight catering services). However, its logistics sales were weighed down by unfavourable business environment.

All in, its 1QFY24 core net loss narrowed by 22%.

QoQ, POS’s 1QFY24 revenue rose 7% on a one-time boost from a government contract as mentioned (+11%), as well as sustained demand for aviation (+5%), partially offset by weaker top-line performance from logistics services (-4%). All in, its 1QFY24 core net loss narrowed by 70%.

Disposal of a shipping-related unit. On a separate note, POS is disposing PNSL Bhd (PNSL) for RM123.2m cash to SWA Shipping Sdn Bhd. A loss-making non-core unit under its logistics segment, PNSL is engaged in ship chartering, ship operating and ship owning, mainly in handling bulk cargoes (dry bulk and liquid bulk) and specialized cement carrier. The disposal entailed EV/EBITDA of 3.0x which is comparable to its more profitable peers ranging from 3.1x to 8.8x, expected to be completed by 4QCY24.

We are positive on the disposal based on POS’s guidance for deconsolidation of loss of RM3.4m and interest savings of RM1.4m. We estimate the disposal could narrow FY25F loss forecast by 10%. The proceeds will also reduce POS’s net gearing slightly from 0.7x to 0.6x. However, it will not substantially alter POS’s weak fundamentals.

Forecasts. Maintained pending the completion of the deal.

Valuations. We also maintain our DCF-derived TP at RM0.33 based on 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).

Investment case. We are cautious on POS due to: (i) its conventional mail business that is struggling 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 11 stores and target of 40 new stores in FY24), we are concerned on the gestation period of the stores to achieve operational efficiency. Maintain UNDERPERFORM.

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 May 2024