POS  Malaysia’s  (POS)  3QFY14  results  fell  below  our  and  consensus estimates. Although  revenue was in line with our forecast, higher-thanexpected  operating  expenses  squeezed  earnings.  The  improved efficiency  in  its  courier  and  landbank  development  units  remain  key catalysts.  We  pare  down  our  earnings  forecast  and  revise  our  FV  to MYR5.60, pegged to a 18x FY15F P/E. Downgrade to NEUTRAL. 

Unexpectedly weak quarter.  POS’  3QFY14 results were weaker than our  and  street  estimates,  with  a  meagre  core  net  profit  of  MYR24.2m (down  53%  y-o-y).  Although  its  revenue  was  in  line  with  our expectations,  higher-than-expected  operating  expenses  eroded  its  net profit  margin, which  consequently  weakened its  earnings. Although the courier segment’s operating profit  continues  to chart positive growth, its mail  and  retail  divisions  weighed  down  overall  group  performance.  Its management claims that the higher operating expenses in 3QFY14 were 
mainly  due  to  increases  in  staff  cost,  jet  fuel  consumption,  repair  & maintenance and  rental  cost.  The company declared an 8  sen dividend for the quarter under review.

Earnings revision. We  trim  our earnings forecast by  25% and 31% for FY14F and FY15F respectively to take into account the  higher  operating expenses.

Key  catalysts  moving  forward.  We  think  that  investors  should  take note  that  POS  still  has  key  catalysts,  which  are:  i)  the  improved efficiency in courier  services could potentially  drive growth further once its  integrated  parcel  centre  is  completed  by  end-2014,  ii)  the  potential development value of its landbank  in Brickfields, Kuala Lumpur,  and c) further potential value creation from its transformation plan.

Downgrade  to  NEUTRAL,  with  a  lower  FV.  Following  our  earnings revision, we are trimming our FV for POS to MYR5.60 (from MYR6.80), pegged to  a 18x FY15F P/E. This is still lower than  the 20x P/E of  its regional  peer,  Singapore  Post  (SPOST  SP,  NR).  We  downgrade  the stock  to NEUTRAL  at this juncture, but  still see potential value creation arising from its transformation, which may improve its future profitability.

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POS Malaysia is Malaysia's exclusive mail services provider.

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Source: RHB