1HFY16 core earnings accounted for only 28%/26% of our/consensus full-year forecasts. The disappointing performance was underpinned by accelerated operating costs (transportation and staff costs). Maintain SELL with a lower MYR2.70 TP (31% downside) based on 15x forward P/E, which is POS’ historical forward P/E average since 2010.

Major disappointment. Pos Malaysia’s (POS) 1HFY16 (Mar) core earnings of MYR33m (-41% YoY) lagged behind our and street’s expectations. Core earnings in 2QFY16 fell sharply to MYR5m (-84% YoY, -81% QoQ), which we attributed to accelerated operating costs (+21% YoY) largely driven by an increase in transportation cost, offsetting a commendable 7% growth in total revenue. We believe this was due to its higher exposure to international mail volume (growth driver for the mail division), which had resulted in higher transshipment cost further compounded by a weaker MYR during the period.

Forecast and outlook. We cut FY16F-18F earnings by c.21% after adjusting for a higher transportation cost that came in above our estimate (we originally forecasted an increase of 3%). Based on the recent results, we note that the increase in transportation cost could be to the tune of c.20%. Due to the post-goods and services tax (GST) adjustment period, we think POS’ outlook should improve slightly going forward, but FY17 earnings will likely be lower than FY15 levels. We believe that POS’ high exposure to international mail (including courier), coupled with high staff cost, could cap the upside to any significant earnings improvement from FY17 onwards.

Maintain SELL. We downgrade our TP to MYR2.70 (from MYR3.11) based on 15x 12-month forward EPS (historical forward P/E over the past five years). We think 15x is fair, reflecting a discount of 26% to Singapore Post’s (SingPost) (SPOST SP, NR) average forward P/E of 20.4x. This is attributed to POS' ongoing structural transformation, unlike SingPost, which had branched out aggressively into the e-commerce space through a series of acquisitions. POS remains a SELL in our view due to the risk of uncontained operating costs that could potentially drag down its earnings moving forward. Our valuation is further supported by a corroborative DCF-derived TP, which has also included the landbank valuation of MYR126m and its estimated net cash position of MYR465m for end-FY16 (see Figure 2).

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Financial Exhibits

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Company Profile

Pos Malaysia is Malaysia's national postal services provider.

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Source: RHB Research - 24 Nov 2015