POS’s 1HFY24 results disappointed on poor cost containment. Its 1HFY24 core net loss expanded 61% YoY as the deteriorating operating environment at its postal segment and logistics services negated the recovery at its aviation services. We widen our FY24- 25F net loss forecasts by 59% and 34%, respectively, reduce our TP by 10% to RM0.30 (from RM0.33) and maintain our UNDERPERFORM call.

POS’s 1HFY24 core net loss of RM76.7m came in wider than our expectation at 85% of our full-year forecast. There is insufficient research coverage by the market to form a consensus estimate. The key variance against our forecast came from its inability to contain operating expenses.

YoY, POS’s 1HFY24 revenue fell marginally by 1% with decrease in demand for its postal service (-3%) and logistics services (-22%) offset by stronger showing from aviation (+27%).

Its postal sales continued to be affected by slowdown in online shopping and lower demand from major e-commerce players that were investing in in-house delivery capabilities (for instance, Shopee Express of Shopee). Moreover, its logistics sales were weighed down by unfavourable business environment.

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).

All in, its 1HFY24 core net loss expanded by 61%.

QoQ, POS’s 2QFY24 revenue fell 10% with the absence of a one-time boost from a government contract for its postal services (-17%), weaker demand for its aviation (-4%), partially offset by improved top-line performance from logistics services (+4%). All in, its 2QFY24 core net loss more than doubled.

Forecasts. We widen our net loss forecast for FY24 and FY25 by 59% and 34%, respectively, to account for higher operating cost.

Valuations. We reduce our DCF-derived TP by 10% to RM0.30 from RM0.33 based on unchanged 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 turn around in the digital age, (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 31 stores and target of 50 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 - 22 Aug 2024