This article first appeared in The Edge Malaysia Weekly, on April 18 - 24, 2016.

THANKS to news reports of a possible tariff hike for its postal services, Pos Malaysia Bhd shares rose 47.6% or 99 sen over three weeks to reach RM3.07 on March 18 — beating all the five target prices of analysts tracking the stock. On March 18 alone, when the government said it was studying the tariff hike proposal, the stock jumped 27.4% or 65 sen.

“If the negotiations go through, it would be extremely positive for Pos as its mail segment currently contributes approximately 50% of its sales,” AmInvestment Bank research analyst Tan Win Son wrote in a March 18 note, pointing out that the last postal tariff increase was in 2010, when regular postage was doubled.

“If Pos is able to negotiate a postal tariff hike by slightly more than 50% (about 90 sen to RM1.05 for standard mail), our analysis shows that it could easily see a doubling of its total net core profits in FY2017,” wrote Tan, who had a “buy” and RM2.50 fair value for Pos.

Tan’s fair value is unchanged but the recommendation is now “hold”, according to Bloomberg data at the time of writing. KAF Seagroatt & Campbell Research, with the most bullish price target of RM2.90, has a “sell” recommendation.

Is there more upside from here?

Kenanga Investment Bank Bhd on April 14 listed two cash-settled call warrants on Pos shares, POS-CX and POS-CY, which both mature on Jan 13, 2017, and have a three-to-one conversion ratio. POS-CX has a RM3.10 conversion price while that of POS-CY is RM2.80. They were both untraded at the time of writing.

Of the five structured warrants issued on Pos, the most trading interest has been seen in CIMB Bank Bhd-issued POS-CV, which has a two-for-one conversion ratio, RM2.77 strike price and expires in about six months on Oct 31.

When Pos jumped 27.4% on March 18, POS-CV jumped nearly 293% from seven sen to close at 27.5 sen in one day. POS-CV has since given up some gains to close at 15 sen on April 13, a 10.4% premium to the underlying shares, which closed at RM2.78 last Wednesday — reflecting 21 times earnings.

Assuming zero premiums to the underlying stock, POS-CV should only be worth 6.5 sen apiece, if Pos reaches the highest target price of RM2.90. Concerns over the rising cost of living also dampen hopes of a postal tariff hike happening this year. But those who reckon there will be a repeat of the March 18 jump might want to keep an eye on these Pos warrants for trading opportunities. 

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