This article first appeared in The Edge Financial Daily on April 2, 2020

Pos Malaysia Bhd
(April 1, 70.5 sen)
Downgrade to sell with a lower fair value (FV) of 58 sen: We project net losses of RM90 million and RM24 million for financial year 2020 forecasts (FY20) and FY21F and a net profit of RM31 million for FY22F (versus a net loss of RM22 million for FY20F and net profits of RM31 million and RM44 million for FY21/FY22F previously), largely to reflect lower revenues due to the company’s suspension of some of its operations and slower demand amid the Covid-19 pandemic. We reduce our FV to 58 sen (from RM1.21 previously), based on a price-to-book value (P/BV) of 0.3 times, a 50% discount to its historical P/BV of 0.64 times, to reflect the unprecedented challenges Pos Malaysia Bhd is facing. We downgrade our recommendation to "sell" from "hold".

Pos Malaysia will temporarily suspend its international mail and parcel services to most of its destinations (except China, Hong Kong, Japan, Singapore and the UK) with effect from March 30, 2020. This is due to the cancellation of flights as well as closure of airports. Based on our back-of-the-envelope calculations, the international mail/parcel services are estimated to make up around 15% of the company's revenues.

Meanwhile, the express mail services will continue with limited destinations, while its core segments, i.e. postal and courier services are operating at reduced capacity during the movement control order (MCO) period, despite being listed as one of the essential services as demand is subdued.

We are now projecting greater contraction of 35% in mail volume in FY20F (versus in the low 20s we assumed previously), as we believe the decline in commercial mail volume (which makes up around 90% of the total mail volume) will accelerate further with businesses stepping up on cost-cutting initiatives as revenues fall off the cliff. We also expect some volume losses on the back of business consolidation amid the economic downturn.

We believe the main challenge for the company is its cost inefficiency as a result of a unionised workforce and its inability to significantly rationalise its extensive network of post offices. Not helping either, is the revenue loss with scaled down operations amid the Covid-19 pandemic. Meanwhile, the courier segment continues to face intense competition, resulting in margin squeeze. — AmInvestment Bank, April 1