This article first appeared in The Edge Malaysia Weekly on June 5, 2017 - June 11, 2017

POS Malaysia Bhd, once seen as part of a sunset industry, has become a proxy to the exponential growth of e-commence in the country. The postal group has been one of the star performers among the large-cap stocks on Bursa Malaysia in the past 12 months, riding high on the surge of interest in logistics counters.

In March last year, the share price had more than doubled from the RM2 level but, more recently, it retreated from RM5.75 following the release of Pos Malaysia’s quarterly results last month.

The group achieved an impressive 46.6% top-line growth for its fourth financial quarter ended March 21, 2017 (4QFY2017). Quarterly revenue came in at RM635.55 million, up from RM433.64 million a year ago. However, net profit contracted 26% to RM10.64 million against RM14.35 million in the previous corresponding quarter.

Cost of sales and operating expenses grew 49% year on year to RM620.52 million from RM416.36 million, and Pos Malaysia has paid 37% more tax, or RM13.39 million, in the quarter under review, compared with RM9.78 million previously.

That said, on an annual basis, net profit expanded 33% to RM84.06 million for the financial year ended March 31, 2017 (FY2017) after two consecutive years of earnings contraction. Revenue clocked in at RM2.08 billion, up 21.24% from RM1.72 billion in FY2016.

Earnings per share (EPS) increased to 12.51 sen from 11.75 sen. Pos Malaysia attributed the earnings growth to higher profit from the courier segment.

At last Friday’s close of RM5.22, Pos Malaysia’s shares were trading at 41.7 times price-earnings ratio (PER) based on an EPS of 12.51 sen in FY2017.

In view of the latest set of earnings figures, some opine that the share price may have run ahead of its fundamentals. It has already factored in the recent news flow of the Digital Free Trade Zone (DFTZ), says Kenanga Research.

“Looking ahead, we expect Pos Malaysia to continue to be affected by weakness in conventional mail volume and the low-margin transshipment business. Courier service demand is expected to improve and overcome the declining mail segment over the longer term due to the e-commerce boom,” Kenanga Research comments in its May 24 results review.

An analyst, who declines to be named, says the 4QFY2017 results were disappointing. Although growth in the courier segment remains strong, earnings were dragged down by poor performance from the both postal and logistics segments.

“However, after the kitchen-sinking exercise, Pos Malaysia will start FY2018 with a clean slate and should perform better moving forward as there is still a room for it to grow its parcel delivery service,” says the analyst.

He noted that the group’s profit margin is rebounding, driven by the courier segment.

Nonetheless, RHB Research analyst Alexander Chia highlights in his quarterly results review that Pos Malaysia’s outlook remains positive as the group will continue to sustain strong earnings growth driven by resilient courier demand, which could mitigate the decline of its postal operations.

In line with the boom in e-commerce, the group signed a memorandum of collaboration last month with online retailer Lazada (M) Sdn Bhd to establish a RM60 million e-commerce regional distribution centre at the former low-cost carrier terminal in Sepang, Selangor.

“The distribution centre has the capacity to handle 182,000 tonnes of items and is expected to start operations by end-August. Pos Malaysia is targeting to handle 34 million items in 2018 and 64 million in 2019. We believe the group should be able to sustain its earnings growth, driven by resilient courier demand and accretive logistics operations, which should mitigate the decline at its postal operations,” Chia writes in the research note.

He has raised Pos Malaysia’s fair value to RM6.30 from RM6.15. “Our target price suggests FY2019F PER of 28 times, +0.5 standard deviation its one-year forward PER. We are of the view that the logistics sector is due for a structural rerating, driven by stronger fundamental earnings growth,” Chia says.

Hong Leong Investment Bank analyst Lim Sin Kiat says Pos Malaysia is the biggest courier offering a large array of services — first-mile delivery, last-mile delivery, haulage, freight forwarding and so on — coupled with the restructuring and expansion of its existing infrastructure, namely, the integrated parcel centre in Shah Alam and new IPC at KLIA.

“At the current level, with a higher PER, the risk is higher and investors’ expectations built into the share price are higher with the growth opportunities in the e-commerce segment,” he says.

Lim believes the launch of the DFTZ project will give a boost to Pos Aviation Sdn Bhd’s revenue as the group will secure additional sources of income from warehousing, distribution, and haulage once the DFTZ commences its initial phase.

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