• NEUTRAL, new DCF-derived MYR0.56 TP from MYR0.63, 8% downside. Results missed expectations. While 9M22 losses narrowed YoY from effective cost controls, the mail and courier segments continued to be hampered by lower volumes handled. We maintain our cautious stance on POS Malaysia’ near-term operating environment, as the competitive courier landscape is expected to result in a further decline in mailing volumes. Nevertheless, we believe the negatives have been priced in, with its downsides offset by management’s promising turnaround strategies.

• Below expectations. 9M22 core loss of MYR70.8m missed expectations, coming in much deeper than our forecasted loss of MYR48m for the full year and consensus’ MYR64m. 9M22 revenue fell 10.3% YoY, attributed to weaker contribution from the postal segment (-18% YoY) due to the drop in overall parcel volume, and logistics (-4% YoY) where last year’s revenue included demurrage and detention charges of MYR19.1m. However, the 20% YoY growth in revenue for aviation, on the back of reopened borders, led to a PBT turnaround to MYR6.3m. All in, 9M22 core losses narrowed by 59% YoY, on successful cost optimisation efforts in the transportation and labour fronts, with 9M22 EBITDA margin at 6.8% (from 2.6% in 9M21).

• Outlook. Although the economic reopening continues to gain momentum, and management expects volume loadings for POSM to improve, we believe the last mile delivery space remains challenging due to shifts in consumption trends, as the e-commerce market softens. Nevertheless, we view positively the meaningful strategies set to be implemented through POSM’s transformation journey – implemented by newly appointed CEO Charles Brewer – which should turn the business around, with emphasis on cost efficiencies and improvements in service offerings. That said, we believe this is a long-term process, and the near-term operating environment remains tainted by the fast-declining mailing business and stiff competition within the last mile delivery space.

• Maintain NEUTRAL. Our previous expectation of a turnaround in 2H22 proved too optimistic, and we now expect the narrowing of losses to be more gradual – deepening our FY22 forecasted loss to MYR108m (from MYR48m) as we expect parcel volume loadings to further soften. We expect FY23 to still be loss-making at MYR51m, while a full-year turnaround is only expected in FY24. Our DCF-derived TP drops to MYR0.56 based on an 8.2% WACC and 2.0% TG, and includes a 2% ESG premium, as our 3.1 ESG score is above the country median. We are NEUTRAL on the stock as we believe the negatives have largely been priced in.

• Key risks include a pick-up/decline in mail volumes and parcel pricing environment, and changes in operating costs.

Source: RHB Research - 22 Nov 2022