e-Commerce yet to boost Pos Malaysia’s earnings

This article first appeared in The Edge Malaysia Weekly, on September 3, 2018 - September 09, 2018.
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POS Malaysia Bhd’s share price saw a sharp decline following the announcement of disappointing results for its first quarter ended June 30 (1QFY2019), as most of its business segments reported a weaker performance amid the increasingly competitive logistics landscape.

The group reported an 86% plunge in its net profit to RM4.98 million for the quarter, from RM35.92 million a year earlier, while revenue declined 3.5% to RM590.46 million from RM611.63 million.

The decline was partly due to an 11% fall in revenue from the postal services segment, which may not be a surprise given the shrinking volume of snail mail nowadays.

However, the sharp fall in net profit was an unpleasant surprise for investors — it barely made up 3% to 5% of consensus estimates for 1QFY2019. Several analysts downgraded the stock.

Speaking to the press after Pos Malaysia’s annual general meeting last Thursday, group CEO Al-Ishsal Ishak said the weak performance was partly due to the Aidilfitri celebrations and the 14th general election, which reduced the number of working days in its first quarter.

“We normalised the numbers and found that the average daily revenue for last quarter was higher year on year,” he explained.

Five out of eight analysts who track the postal group have a “sell” call on it after the release of its results, while two analysts, namely Macquarie’s Azita Nazrene and RHB Investment Bank’s Michelle Foong, have a “buy”. One analyst is maintaining a “hold” , according to analyst recommendations compiled by Bloomberg.

Pos Malaysia’s share price dipped 12% to close at RM3.68 on Aug 27, the first full trading day after the release of its quarterly results on Aug 24. It slipped further to RM3.62 on Aug 28, translating into a year-to-date fall of 31% from its closing price of RM5.25 at end-2017.

Kenanga Investment Bank analyst Steven Chan says the results were “severely poor” amid the underperformance of most of Pos Malaysia’s business divisions, in addition to a higher effective tax rate.

“The huge disparity was due to the severe underperformance of its postal services, courier and international segments, coupled with its unusually higher effective tax rate of 64% this quarter. The higher taxes were caused by under-accrual of the prior year’s deferred tax and increase in expenses, which were non-tax deductible,” he says in a research note.

Chan highlights that the profit margin of the courier segment — known as “e-Commerce” — was significantly lower at 12.5% versus 22.5% a year earlier due to intensive competition. The segment is perceived to be the group’s growth locomotive because its traditional mail service is facing falling demand, but Chan does not expect the business environment to improve much in the near term.

Moreover, Pos Malaysia is facing some operational issues that has weighed on its performance.

Chan points out that the group’s elevated operating expenditure and expansion efforts have resulted in narrower profit margins. Also, its inability to close down loss-making post offices — which may be due to its social obligations — will continue to drag on its postal services operations.

“In view of its devastatingly disappointing results, we find it necessary to slash our FY2018 and FY2019 earnings [estimate] by 75% and 52% [respectively] after accounting for greater losses in its postal services, lowered margins for its courier segment, lowered growth assumption for its international segment and higher effective tax rate,” he says, adding that the stock is trading at “unattractive PE valuations of 136 times and 54 times, based on FY2019 and FY2020 earnings”.

Kenanga has an “underperform” call on Pos Malaysia with a target price of RM3.10.

Al-Ishsal said the group is looking at adding a retail element and financial services to its branches. It currently has 691 branches in the country. It is also in talks with the government to allow the provision of government counter services, such as passport renewal, at its branches.

He also hinted that Pos Malaysia is considering several innovative solutions, including the viability of having a crowdsourcing platform for the delivery of parcels and the use of drones in certain places, such as rural areas.

“These are all more long-term things. In the short term, we need to manage our costs well and look at new products. There are some low-hanging fruits and some that will show results in the mid- and long term. The challenge is to do it quickly and get the numbers there,” he said.

In the latest quarterly results filing, the postal group says it will need to continue to invest in new technology platforms in the near term, to roll out innovative product and service offerings.

Hong Leong Investment Bank analyst Andrew Lim says the near-term outlook for the company is cautious as he expects the impact of improvements on operational efficiency to be reflected only much later.

“Pos Malaysia will continue to be dragged by its high fixed-cost structure, coupled with stiff competition in the courier segment, which is its biggest earnings contributor. We believe improvements in operational efficiency from the initiatives set out by management will only be apparent in the longer term, estimated to be by 2022,” he comments.

Lim has downgraded his call on Pos Malaysia to “sell” with a lower target price of RM3.03, from RM3.40 previously.

He says Pos Malaysia is looking at several measures to address its declining profitability, including the integration of its workforce from the postal services and courier segments as well as requesting a higher postal tariff hike from the new Malaysian Communications and Multimedia Commission, given that the last increase was in 2010.

Lim, however, believes that a tariff hike is unlikely as the newly elected administration will act cautiously to avoid public dissatisfaction.

Pos Malaysia is also repricing its corporate courier rates for larger customer accounts on a gradual basis to improve its courier margins, although it is seen as not having strong pricing power given the competitive environment in the industry.

“We believe short-term earnings will continue to be hampered by margin compression,” Lim says.

Meanwhile, RHB’s Foong has a contrarian view on Pos Malaysia, maintaining her “buy” call on the stock, albeit with a lower target price of RM4.60, with an eye on the potential of the Digital Free Trade Zone (DFTZ).

“The company’s near-term outlook should remain challenging as it restructures its cost base and adapts to changing demand.

“We expect prospects to stay positive in the mid- to longer term as we anticipate the courier segment to see stronger growth when the DFTZ starts to contribute more meaningfully from 2020 onwards,” she says.

That said, Foong has trimmed her earnings estimates for FY2019 and FY2020 amid expectations of slower revenue growth ahead, weaker margins and potential consolidation in the logistics segment.

 

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