This article first appeared in The Edge Financial Daily on February 17, 2020

Pos Malaysia Bhd
(Feb 14, RM1.40)
Maintain hold with an unchanged target price (TP) of RM1.55 per share: Pos Malaysia Bhd announced that it had entered into a share purchase agreement and a shareholders’ agreement with SIA Engineering Co Ltd (SIAEC), in relation to the proposed divestment of a 49% equity interest in Pos Aviation Engineering Services Sdn Bhd (PAES) to SIAEC. Pos Malaysia shall transfer 7.8 million ordinary shares representing 49% equity interest in PAES to SIAEC, for an indicative cash consideration of RM10.1 million. The indicative disposal consideration was arrived at on a willing buyer-willing seller basis and after taking into consideration the unaudited net assets of PAES as at July 31, 2019 of approximately RM20.6 million, which included the market value of PAES’s property, plant and equipment as at Oct 1, 2019 of RM12.3 million as appraised by an independent valuer.

The proposed divestment will facilitate the entry of SIAEC as PAES’s strategic partner and allow the latter to expand its customer base, enhancing its technical expertise, expanding its product offerings and diversifying into new lines of maintenance, repair and operations, and tapping into new markets and distribution networks. We believe this is a good move for Pos Malaysia to garner more clients for PAES and may be a turnaround for PAES after registering a loss of RM1.7 million for its financial year ended March 31, 2019 (FY19). However, we reckon that this will only be a marginal gain for Pos Malaysia.

Upon the completion of the divestment, Pos Malaysia and SIAEC will hold 51% and 49% equity interest in PAES respectively and it will become a jointly-controlled entity of Pos Malaysia.

Maintain “hold” with an unchanged TP of RM1.55 based on 0.7 times its FY20 book value of equity per share of RM2.22 (at -1.25 standard deviation below its three-year historical price-book ratio of 1.46 times). Notably, this is below its peer’s (Singapore Post Ltd) three-year average of 1.9 times. The discount is fair in view of its high fixed-cost structure and margin compression in their courier segment due to an increase in players in the market. However, this should be balanced by upside of positive sentiment from the impact of a tariff hike, which will only be an ephemeral victory at best while the issues of declining mail volume will persist. — Hong Leong Investment Bank Research, Feb 14