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This article first appeared in The Edge Malaysia Weekly on July 22, 2019 - July 28, 2019

AS Pos Malaysia Bhd grapples with its bread-and-butter snail mail and courier businesses, its aviation ground services provider segment, operating under Pos Aviation, is also under investor scrutiny.

In a nutshell, margins are shrinking and competition is intensifying, which Pos Malaysia acknowledges. The segment’s profit fell 29.4% year on year to RM26 million in FY2019, despite a 5% rise in revenue to RM296.1 million.

Profit fell despite an increase in total tonnage handled, from 298,087 tonnes in FY2018 to 344,596 tonnes in FY2019.

“We are facing intense competition, yet our market share is increasing after recently welcoming Royal Brunei Airlines, Citilink, Vietjet, Oman Air, Air Arabia and Scoot (in Kota Baru) as our new customers,” Pos Malaysia says. “Of foreign airlines that fly into Kuala Lumpur International Airport, Pos Aviation provides ground handling services to 63% [of their] frequencies.”

In FY2018, it adds, the market share was 58%. It attributed the drop in profit mainly to additional costs, including rent, capitalisation of total investment incurred for development of its e-commerce fulfilment facility and the implementation of the minimum wage.

The growing competition is partly due to the emergence of Ground Team Red Holdings Sdn Bhd, which was launched in October 2017, according to analysts. Ground Team Red is a joint venture between AirAsia Group and Singapore’s SATS Ltd.

AirAsia is the single largest airline by passenger volume operating across the Malaysian airport network while SATS is the chief ground-handling and in-flight catering service provider at Singapore Changi Airport, with a presence across Asia and the Middle East.

In a July 4 research note, Nomura Research flagged the matter as a concern for Pos Aviation. “We remain concerned about Pos Aviation’s profitability, which in our view could face a threat from Ground Team Red as the latter has been increasingly gaining share.”

Nomura Research has a “reduce” rating on Pos Malaysia with a target price of RM1.46. Of the other five analysts tracking the counter, three have “sell” calls with target prices ranging from RM1.16 to RM1.40 while the other two have “neutral” ratings.

As to how Pos Aviation plans to protect its market position and push for a larger share, the company says it intends to leverage technology and digitalisation to improve efficiency, service quality and productivity. The plans also include “embarking on market and strategic alliances with global and regional players while exploiting opportunities in the One Belt One Road Initiative in logistics and e-commerce”.

In September 2016, Pos Malaysia completed the acquisition of the aviation business from its major shareholder, DRB-Hicom Bhd in a deal that also included buying Konsortium Logistik, for a combined RM749.35 million. Investors doubted the merits of the related-party deal, considering the price tag.Selling pressure pushed the stock to a then multiyear low of RM2.

At the time, DRB-Hicom owned a 32% stake, which it bought for RM622.79 million from Khazanah Nasional in 2011. DRB-Hicom received shares for the deal, bumping its shareholding to 53.5%. Other substantial shareholders in Pos Malaysia at the moment are the Employees Provident Fund with 8.3% and Kumpulan Wang Persaraan (Diperbadankan) with 7.8%.

 

 

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