• Communications and Multimedia Minister Gobind Singh Deo told Dewan Rakyat yesterday that under the Digital Free Trade Zone (DFTZ) 2019 initiative, two airports — Penang International Airport and Subang Airport — and a port, Port Klang would be the three latest locations under the initiative to make Malaysia a regional e-commerce fulfillment hub.

• We view the move to include a port and the two airports into the DFTZ initiative to be potentially positive for Pos Malaysia (Pos) as to date, only the KL International Airport has been involved in DFTZ at its pilot phase at the KLIA Air Cargo Terminal 1 (KACT-1) which only caters to trade by air. Previously, Pos had shared that 90% of trades are done by sea thus the inclusion of Port Klang into DFTZ would allow the initiative to be more impactful.

• Since our last report on 24 May, Pos’ share price had soared by 38% from RM1.36 to RM1.87 in light of the potential postal tariff hike. Postal tariffs have been unchanged for the past 10 years and the last tariff hike saw postal rates rising by approximately 20–100%. Although a postal tariff hike would help increase postal revenues, our view is that the tariff hike would only be a temporary relief as it could drive postal volumes downwards due to the higher rates charged and the postal segment would still be weighed by high costs due to the universal service obligation (USO).

• We maintain our SELL recommendation on Pos with unchanged forecasts and fair value of RM1.16/share, (WACC: 8.1%, terminal growth rate: 1.5%) as its outlook is still expected to remain challenging in the short term. The performance of nearly all of its segments has deteriorated and its courier segment’s margins have also been impacted by price competition amongst courier players.

Source: AmInvest Research - 16 Jul 2019