Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

Pos Malaysia Bhd is emerging as an integrated logistics service provider as it pieces together its e-commerce jigsaw. Granted, the stock has advanced more than 86% over the past year but there may yet be a case to consider it.

Barely a month after inking a strategic collaboration with Tigers Global Logistics (M) Sdn Bhd (TGL), on April 5, the postal service provider plans to forge another partnership, this time with popular online shopping site Lazada, in early May, group CEO Datuk Mohd Shukrie Mohd Salleh tells The Edge.

While Pos Malaysia’s scope in the Lazada deal is likely to be smaller, it is understood that it will bring a bigger volume of parcels.

As for the TGL alliance, Mohd Shukrie had said earlier that it would add about RM30 million to Pos Malaysia’s revenue in the financial year ending March 31, 2018 (FY2018) and RM100 million in FY2019. To recap, Pos Malaysia’s e-commerce fulfilment from its existing cargo centre at the Kuala Lumpur International Airport will be handled by TGL using its SmartHub technology and warehouse management system.

TGL is a unit of Hong Kong-based Tigers Ltd, a global logistics firm whose network of offices spans Asia, North America and Europe.

Domestically, Pos Malaysia will provide first-mile and last-mile delivery with the mandate to manage the entire supply chain, says Kenanga Research.

The TGL-Pos Malaysia partnership is expected to broaden the reach of both parties across Malaysia and Asia-Pacific. It will also add to Pos Malaysia’s expansion following its acquisition of KL Airport Services Sdn Bhd (now known as Pos Aviation Sdn Bhd) last September from major shareholder DRB-Hicom Bhd for RM749.35 million in new shares.

The acquisition included Pos Aviation’s subsidiary, Konsortium Logistik Bhd, one of Malaysia’s largest haulage and transport companies. Pos Aviation itself is an aviation ground service provider, covering ground and cargo handling to aircraft maintenance and engineering services for commercial airlines.

“We expect Pos Malaysia’s profitability to improve going forward as it can now offer air-sea-land transport solutions, from warehousing to logistics and order fulfilment, compared with just being a last-mile delivery operator,” says RHB Research in an April 25 note.

Key risks for Pos Malaysia include slower volume from its courier and traditional postal segments, escalating transport costs and uncontrolled labour costs, the research house adds.

 

Good proxy

The putting together of Pos Malaysia’s integrated e-commerce network makes it a good proxy for an expected e-commerce boom amid an increasingly crowded landscape with more logistics firms banking on the platform to drive growth.

Pos Malaysia has the widest reach in Malaysia, thanks to its status as the sole postal service provider in Malaysia, an analyst points out. It also commands about 40% of the courier market of about 30 competitors.

This augurs well for the company, considering Malaysia’s e-commerce market, which is valued at US$1.1 billion and has an expected compound average growth rate of 23.2% between 2017 and 2021, according to Hamburg-based market research portal Statista.

“Currently, merchandise e-commerce trade accounts for less than 1% of total retail sales in Malaysia,” says RHB Research. “Given Pos Malaysia’s extensive postal and courier network, we see it as a key beneficiary of stronger handling volume and earnings growth as e-commerce retail sales increase.”

The question is, will a sector-wide bet on e-commerce pay off for logistics players, and if so, when?

While logistics firms such as Pos Malaysia and GD Express Carrier Bhd (GDeX) are seeing strong growth in their e-commerce segments, data from brokerage and investment firm CLSA indicates that Malaysia’s online retail spend per capita of 2.5% in 2015 and 2.3% in 2014 still lag behind that of its regional peers. For example, China’s online retail spend per capita is 25%.

“There are a lot of moving parts for an e-commerce boom to take off here. For example, your system must be integrated with, say, Alibaba’s system. Otherwise, the delivery process may not be smooth,” says an analyst, adding that with a sizeable number of players betting on e-commerce to drive growth, the questions that arise are: how big is the pie, will the intense competition put pressure on margins and how will the pie be divvied up among the players?

Other analysts believe Pos Malaysia valuations are already lofty with a sentiment-driven rally in the logistics sector pushing them ahead of fundamentals.

Of the seven analysts tracking the counter, three have “buy” calls on it compared with two “sell” and two “hold” recommendations. Target prices range from KAF Seagroatt & Campbell’s RM2.90 to Macquarie Research’s RM7.40.

At its closing price of RM5.21 last Friday, Pos Malaysia was trading at a price-earnings ratio (PER) of over 36.4 times, one of the highest valuations for logistics firms on Bursa Malaysia.

“Fundamentally, earnings growth implied by market valuation is quite high. So, the question is, can they deliver the growth?” asks an analyst.

 

CEO confident

Mohd Shukrie agrees that the earnings need to justify the valuations but he is confident Pos Malaysia can deliver in this respect.

From the company’s perspective, the e-commerce boom is already happening. Its courier unit, Pos Laju, is forecast to record 25% year-on-year growth in FY2017, higher than the 15.8% seen in FY2016.

“It is very difficult to achieve this sort of growth, given Pos Malaysia’s already sizeable base unless the e-commerce pie is really big,” says Mohd Shukrie. He notes that despite the increasing number of logistics firms in e-commerce, there is no real consolidation yet, which implies that there is enough room for everyone in the field at present. He adds that he does not expect any consolidation in the next five years.

On whether courier margins will be pressured by the stiff competition, Mohd Shukrie says Pos Malaysia has an advantage — it can count on walk-in customers in addition to contract clients.

The average revenue per walk-in customer is about RM10, says the group CEO. In contrast, contract clients enjoy discounts of up to 70% in some cases, although this is mitigated by the volume they offer.

Pos Malaysia recorded revenue of RM1.72 billion and net profit of RM63.09 million in FY2016. Its courier segment contributed RM556.1 million or 32.3% to the top line, behind the mail segment’s 52.7%.

In terms of contribution, Mohd Shukrie expects the courier segment to overtake mail eventually. The courier segment delivered 70 million parcels in FY2016 and aims to increase this to 100 million over the next two years.

For the nine-month period ended Dec 31, 2016, Pos Malaysia posted a net profit of RM73.42 million — up 50.6% y-o-y — on revenue of RM1.45 billion, which was 12.7% higher y-o-y. It attributed the increased turnover to the KL Airport Services acquisition, which contributed RM169.3 million.

RHB Research expects Pos Malaysia to register revenue of RM1.97 billion for the financial year ended March 31, 2017, with recurring net profit tipped to reach RM93 million.

 

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