This article first appeared in The Edge Financial Daily on September 8, 2017 - September 14, 2017

Pos Malaysia Bhd
(Sept 7, RM5.46)
Maintain hold call with an increased target price (TP) of RM5.09: We came away from Pos Malaysia Bhd’s first quarter ended June 30, 2017 (1QFY18) briefing feeling neutral. 

The retail division incurred losses in the 1QFY18 mainly due to the reduction in commission for the handling of Amanah Saham Nasional Bhd (ASNB) transactions. It was reduced to 35 basis points (bp) for deposits and 10bp for withdrawals from 50bp for both previously, resulting in a drop in revenue. 

Partially offsetting the weakness was the stronger insurance sales commission.

The courier division continued to grow at 11% in 1QFY18, broadly in line with its peers thanks to the growth in e-commerce volume. However, the growth posted seemed to indicate a slight slowdown in comparison to the expectations of a 17% annual growth for its courier volume, raising concerns of a potential cool-down in e-commerce-driven volume growth. 

We remain sceptical that the courier division growth would exceed 11% in the coming quarters on expectations of stronger volume due to the festive seasons at the end of the year.

A significant portion of its planned capital expenditure of about RM60-70 million for its Low Cost Carrier Terminal (LCCT) centre has been spent in the 2QFY18 on flooring upgrades, infrastructure and basic ICT systems. The remaining works to be completed include a system integration by Lazada (M) Sdn Bhd and the installation of the racking system which is expected to be completed in two to three weeks. 

Rental to be paid to Malaysia Airports would be exempted until January next year for transitional purposes and the group is expecting the LCCT centre to commence operations by 3QFY18.

On its transformation plan, the group has already installed 60 units of Ezibox for 24-hour parcel pick-up and drop-off and is targeting to increase the capacity to 110 units by December this year.

Most of the units would be installed at Petronas and Shell petrol stations to expand its network of pick-up and drop-off points for better customer experiences. 

To date, 34 PosLaju offices have been renovated with equipment upgrades to better serve the e-commerce industry. The group targets to renovate all 86 offices by year end with similar upgrades.

The risks include inability to raise postal tariff and the introduction of new services or products which fail to mitigate declining mail volume.

Our earnings forecasts for FY19/FY20 are raised by 7.6%/5.8% to account for cost savings from the acquisition of two bulk vessels for the Tenaga Nasional Bhd contract.

E-commerce will anchor its long-term growth as Pos Malaysia is the primary beneficiary of the boom. Current growth can only be seen in its courier division and we expect its logistics division to benefit as well in the longer run.

Meanwhile, drag from the postal division remains a concern. Post earnings revision, TP is increased to RM5.09 from RM4.73 pegged to unchanged 25 times FY19 price-earnings ratio. — Hong Leong Investment Bank, Sept 7