Pos Malaysia Bhd
(May 25, RM4.60)
Maintain hold with lower target price of RM4.80 from RM4.90 previously: Pos Malaysia’s earnings for the fourth quarter ended March (4QFY15) came in at RM19.9 million, bringing FY15 core net profit to RM127.1 million, representing a 20.1% year-on-year (y-o-y) drop.

This is lower than expected, accounting for only 90% of our estimate and 86% of market estimates. No dividends were declared in FY15.

Revenue for the mail segment for FY15 came down by 4.7% y-o-y and earnings declined to RM79.5 million, down 45% y-o-y, due to lower mail volume and the absence of the one-off revenue surge of RM11 million arising from the 2013 general election in FY14.

As a consequence of Pos Malaysia’s high operating leverage, the mail segment’s earnings before interest and tax (Ebit) margin deteriorated to 11%.

However, the courier segment’s strong performance mitigated mail’s decline, registering a profit growth of 17.9% y-o-y, largely boosted by the growing e-commerce industry.

The courier segment contributed to 60% of total earnings in FY15 compared with 41% in FY14.

We noted some traction from Pos Malaysia’s efforts to improve its retail segment, which registered a narrower FY15 loss of RM32.6 million compared with FY14’s loss of RM41.8 million due to higher contributions from financial services and insurance commissions.

Looking ahead, Pos Malaysia will continue its five-year strategic plan to diversify away from post towards its ultimate goal of becoming a regional postal and logistics player.

Key growth drivers remain:

(i) The steady growth of the courier segment — We noted a risk of escalating costs in courier in 4Q, whereby its Ebit margin was 19 percentage points lower quarter-on-quarter (q-o-q). However, capital expenditure investments in its courier services with the new integrated parcel centre and parcel lockers in FY16 may help protect margins; and

(ii) The expansion of mail’s high margin Direct Post business through more product awareness.

A potential downside is a pending tariff increase for international mail by the Universal Postal Union as a result of Malaysia’s recent rating upgrade to “Developed Country”. This will increase Pos Malaysia’s costs for international mail delivery and reduce the positive impact currently enjoyed by the mail segment’s trans-shipment business.

Pos Malaysia will likely try to negotiate an increase in its local postal tariffs, which if successful, will be favourable to the company.  Local mail contributes the bulk of its income.

Pos Malaysia currently trades at 19 times FY16 price-earnings ratio (PER), compared with Singapore Post Ltd’s 24 times forecast FY16 PER. — AmResearch, May 25

This article first appeared in The Edge Financial Daily, on May 26, 2015.