POS was offered KLAS and a parcel of industrial land from DRB-HICOM to be settled via the issuance of new shares. We keep our MYRYR2.70 TP (4% downside) pending further information on the proposed transaction, but revise to NEUTRAL. We estimate that KLAS needs to generate earnings of c.MYR50m-60m to avoid any potential EPS dilutionat POS.

Offer to acquire Kuala Lumpur Airport Services SB (KLAS). POSMalaysia (POS) announced the receipt of a proposal from DRB-HICOM (DRB MK, NEUTRAL, TP: MYR1.18) to purchase the latter’s interest in KLAS for MYR766.16m and a 9.9-acre land parcel in Selangor for MYR69m. The proposed MYR835.16m in total transaction is to be satisfied via the issuance of 250.8m new POS shares at MYR3.33/share, subject to share price adjustments. This issuance expands its existing share base by an additional 47%, after which DRB-HICOM would own 54% (from 32.2%) of POS. The latter intends to seek a waiver from making a mandatory general offer. We believe the minority shareholders would need to approve this deal should POS’ board accept the offer.

Potential long-term benefits. The acquisition could create a synergistic relationship between POS’ business segments and diversify its earnings base to mitigate the declining earnings of its traditional mail businessover the long run, in our view. We estimate that KLAS needs to contribute earnings of about MYR50m-R60m in FY17 to avoid any EPSdilution from the potential transaction (Figure 1).

Risks and forecasts. We keep our earnings forecast unchanged at this juncture. Key risks to our earnings forecast includes POS’ inability to contain operating costs (attributable to staff and transportation costs), which could potentially drag down its earnings moving forward.

Revise to NEUTRAL. We revise our call to NEUTRAL, largely due to the run down in share price. There is no change to our MYR2.70 TP, pending further information on the proposed transaction. Our TP is based on POS’ 12-month forward EPS and an unchanged 15x P/E multiple, a 10% discount to its 5-years average forward P/E. Our valuation is further supported by a coroborative DCF-derived TP of MYR2.86 (Figure 4).