DRB-Hicom Bhd
(Dec 6, RM1.06)
Maintain add recommendation with an unchanged target price of RM1.69: DRB-Hicom’s 53.5%-owned Pos Malaysia Bhd, the national postal services company, held an analyst briefing yesterday.

Key takeaways include management hopes to obtain approval for postal rate hikes in the quarter ended March 31, 2017 (FY3/17), courier segment should continue to benefit from the growing demand of e-commerce, and management is confident of achieving its FY3/17 cost savings target.

Pos Malaysia’s proposed postal tariff hikes are still pending government approval and management is targeting approval in FY3/17. Meanwhile, courier delivery rates for walk-in customers have been raised by 90 sen across the board.

Based on channel checks, the new PosLaju rates for 1kg parcel for delivery within Peninsular Malaysia are still approximately 50% lower than its competitors, such as GDex and City-Link. Pos Malaysia previously indicated that the courier segment is expected to overtake the mail segment in the next two years.

In its first half of FY17 (1HFY17) results, courier segment revenue rose 22% year-on-year, driven by growth in e-commerce. The segment contributed 40% of Pos Malaysia’s total revenue in 1HFY17 (versus 34% in 1HFY16). In line with the growth, it plans to expand its processing facility (currently housing PosMel and PosLaju), which will double its capacity to about 300,000 items per day. Management indicated that the process of shifting deliveries from mail to courier will only happen as and when mail volume drops to ensure enough resources for mail deliveries.

Its acquisition of Pos Aviation (previously known as Kuala Lumpur Airport Services Sdn Bhd) will transform Pos Malaysia into an integrated logistics services provider for traditional and e-commerce markets. However, due to a rebranding exercise for synergy, which will incur capital expenditure and expansion costs, we do not project a positive earnings contribution in the short term. DRB consolidated Pos Malaysia into its balance sheet following the acquisition completed in Sept 2016, and recognised a remeasurement loss of RM130.2 million of its initial investment in Pos Malaysia.

Pos Malaysia’s 1HFY3/17 net profit grew by 47.2% due to a better performance from the courier segment, which posted stronger operating profit growth of more than 100%, despite the swing to losses for the postal services segment.

This was due to cost saving measures, such as better rental rates, and the ability to negotiate better contract terms following the consolidation of Pos Aviation and Pos Logistics (formerly Konsortium Logistik Bhd), an end-to-end solutions provider (from transporting goods from sellers to last-mile delivery to purchasers). — CIMB Research, Dec 6