This article first appeared in The Edge Financial Daily, on December 14, 2015.

Pos Malaysia Bhd
(Dec 11, RM2.80)
Maintain sell with a lower target price of RM2.40: DRB-Hicom Bhd has offered to sell Pos Malaysia Bhd its wholly-owned KL Airport Services Sdn Bhd (KLAS) (including Konsortium Logistik Bhd [KLB]) and 9.916 acres (4.01ha) of land in Pekan Hicom for a consideration of RM835.16 million, subject to the complete capitalisation of RM552.9 million owed by KLAS to DRB-Hicom and the transfer of 100 acres of land in Kedah from KLB (owned by KLAS) to DRB-Hicom.

The RM835.16 million consideration will be satisfied via an issuance of 250.8 million shares by Pos Malaysia at RM3.33 per share. Post the completion of the exercise, DRB-Hicom may own up to 55.6% stake in Pos Malaysia (based on the current share price), and Pos Malaysia will become a subsidiary of DRB-Hicom from being a 32.2% associate.

DRB-Hicom will apply for exemption from the Securities Commission Malaysia from undertaking a mandatory takeover offer of Pos Malaysia post the disposal exercise.

Based on DRB-Hicom’s annual report, KLAS registered a RM7.2 million pre-tax profit in financial year 2015 (FY15), indicating a RM6 million net profit.

The acquisition price of RM766.16 million indicates at least 100 times price-earnings ratio valuation. We are unsure of the book value and financial position of KLAS at the moment.

Despite the positive impact of the exercise on DRB-Hicom, we are relatively negative on the deal from Pos Malaysia’s point of view, given the high valuation.

With the injection of KLAS and KLB into Pos Malaysia, Pos Malaysia may have to inject capital into these units for expansion purposes, which will eventually limit the potential dividend payout of Pos Malaysia.

Assuming potential earnings of RM10 million for FY17 from KLAS, earnings-per-share dilution for Pos Malaysia would be 28.4%. — Hong Leong Investment Bank Bhd, Dec 11