Macquarie Equities Research (MQ Research) wrote a report on the recent meetings between Pos Malaysia and AirAsia’s CEO regarding their willingness to cooperate on the logistics for the digital free trade zone. From the meetings, MQ Research expressed their positive view on the collaboration, seeing potential long-term earnings and shareholder value for both companies.

MQ Research has “Outperform” rating for Pos Malaysia, AirAsia and AirAsia X, with their top-of-the-Street target prices of RM7.40, RM4.00 and RM0.490 respectively. 

Conclusion

• Recent meetings with Pos Malaysia CEO Dato’ Shukri and Malaysia AirAsia CEO Aireen Omar suggest a willingness to cooperate in the logistics element of the digital free trade zone. Such cooperation, in MQ Research’s view, would be positive for both long-term earnings and shareholder value; for AirAsia and AirAsia X it will increase utilisation of belly cargo space and for Pos Malaysia it will see better utilisation of its upcoming fulfilment centre.

Impact

• Online marketplace + fulfilment services at an airport with excess runway capacity & abundant land for expansion + low-cost high-frequency airline + digital free trade zone = an ideal fit. Combining Pos Malaysia’s expertise in last-mile delivery and its upcoming fulfilment capabilities at the world’s first digital free trade zone in Kuala Lumpur International Airport, with AirAsia’s high-frequency, quick airport turnaround and low unit cost model, MQ Reasearch see Pos Malaysia, AirAsia and long-haul sister AirAsia X, as an ideal fit to provide a time- and cost-efficient logistics solution to Alibaba’s first overseas e-hub.

• AirAsia group is the leading LCC in Asia with the highest frequency and number of destinations. As the lowest unit cost producer, it is able to provide its under-utilised belly space to transport e-commerce items in a cost- and time-efficient manner.

• These factors, in MQ Research’s view, facilitate Jack Ma’s eWTP (Electronic World Trade Platform) proposal where small-to-medium enterprises (SMEs) can easily plug into global trade via e?commerce and “overcome transactional, custom clearance, logistics and financing challenges”.

• Earnings accretive. Such a collaboration, in MQ Research’s view, would be earnings-accretive, where each party earns revenue on its under-utilised assets (warehouse for Pos Malaysia and belly space for AirAsia and AirAsia X).

• AirAsia CEO Aireen Omar said that its low-cost courier product RedBox has not reached its potential. Dealing mainly through cargo agents and operating without a cargo warehouse, its cargo revenue makes up only ~2% of airline revenue in FY16A. Its ASEAN peers, Singapore Airlines and Thai Airways, generate ~10-11% of revenue from cargo.

Action and Recommendation

• MQ Research rate Pos Malaysia, AirAsia, and AirAsia X Outperform and have top-of-the-Street target prices of RM7.40 (+51% total shareholder return (TSR)), RM4.00 (+27% TSR) and RM0.49 (+23% TSR), respectively.

• MQ Research’s investment thesis for these stocks are:

• Pos Malaysia is an asset turnover story, helped by reforms undertaken by the company to turn it into a more efficient postal operator.

• AirAsia has upside potential from leasing portfolio monetisation.

• MQ Research believe AirAsia X will be able to sustain profitability trends in FY17.

Source: Macquarie Research - 21 Apr 2017