Our recent meeting with POS Malaysia reaffirmed our positive stance on the company’s outlook as the decline in its mail segment was not as severe as anticipated. Its courier segment is poised to strengthen while its retail segment will be boosted by the expansion of Ar Rahnu outlets. Maintain BUY, with our FV at MYR5.00, pegged to an unchanged 14.4x FY14F EPS.

Prospects remain bright. We met up with POS Malaysia’s management recently and came away certain that the company’s outlook remains bright, mainly due to the following:

(i) The slowdown in its Mail Segment was less than anticipated while growth of its Direct Mail services has mitigated the expected decline in conventional mailing services.

(ii) Its Courier Service is poised for stronger growth, with the double-digit expansion looking intact. This is driven by the strong demand within the e-commerce segment and encouraging take-up of its prepaid boxes. POS Laju has also extended its reach by appointing authorised agents, of which MPH Bookstores SB is the first of many.

(iii) The growth of its Retail Segment is supported by the expansion of the Ar Rahnu outlets. Although contribution from this segment is still small, POS Malaysia is confident of growing the pie. Management is expanding the number of Ar Rahnu’s outlets to 50 by month- end. The outlets were initially scheduled to be completed last month but delayed due to operational snags, specifically in the more rural areas where infrastructure, or the lack of, posed some challenges.

Mail segment volume dips marginally. In developed countries, the conventional mail segment has been declining sharply due to the increase in the usage of electronic mails which is faster, cheaper and more eco-friendly. As Malaysia continues on its path to become a developed country, such a trend is unavoidable. POS Malaysia understands this, and has branched out. It has unlocked one of its most valuable assets – its network – to advertisers, offering them Direct Mailing services to targeted audiences. Volume has been picking up and this has helped the company cushion the sharp decline in conventional mail.

Robust growth for courier services. Apart from the strong demand from ecommerce, POS Laju has created new avenues to increase the sales volume of its prepaid service as well as expanding its reach via authorised agents. This business model was put into action last December and MPH Bookstore SB became the first of many appointed authorised agents. We also learned that POS Laju intends to expand into the logistics segment and do not rule out an expansion into third party logistics (3PL) via the provision of warehousing services.

Ar Rahnu’s alternative financing strategy. POS Malaysia has set its focus on expanding Ar Rahnu services in the East Coast of the Peninsular by targeting cottage industries and small entrepreneurs. We believe such a niche strategy could prove to be successful as Ar Rahnu provides an alternative to easy financing for small communities. A vast network of post offices nationwide is a plus, providing easy access to customers. Further improvements to this service in ensuring the privacy of visitors could help win more clients. As Ar Rahnu is still a relatively new venture, we are not imputing any earnings contribution into our forecast. However, we do not discount the fact that it may become a significant growth driver for the company in the near future.

Not in a hurry to dispose off land. POS Malaysia does not have any concrete plans currently to monetise its valuable landbanks. The most valuable piece of land is the plot which its current headquarter sits on in KL Sentral. Management said it may look into potential JVs to develop its entire landbank.

Special dividends in the offing? Management did not commit to a special dividend but look to maintain its generous dividend payout ratio of over 50%.  We had earlier highlighted that POS Malaysia has MYR70.8m under Section 108 of the Income Tax Act 1967 that it can dish out as special dividends. Based on its current share base, this could translate to a dividend of 13.2 sen per share, or an additional yield of 3%. Under Section 108, the company will need to use up the funds by 31 Dec 2013. POS Malaysia is able to pay up to MYR212.5m from its retained earnings. Nevertheless, are subject to shareholders’ approval.

Maintain BUY, FV unchanged at MYR5.00. We continue to remain positive on POS Malaysia’s outlook and value the company at a 14.4x FY14F PE, which is at a 15% discount to its regional peer, Singapore Post.

Source: RHB