This article first appeared in The Edge Malaysia Weekly, on February 29- March 6, 2016

WITH its nationwide distribution network, Pos Malaysia Bhd should be in an advantageous position to ride the e-commerce boom that is said to be gaining steam now.

In other words, the postal group is supposed to be in its next phase of growth, driven by the popularity of online shopping.

Pos Malaysia has 8,000 postmen, 702 post offices, 239 Pos Mini, a network of 25 mail processing centres and 329 delivery branches throughout the country, 68 Pos Laju centres, 2,336 vehicles, 264 dedicated counters for Pos Laju, six outlets at LRT stations and more than 6,500 delivery routes throughout Malaysia under its belt. No other company in the country has its extensive logistics reach.

But its latest financial results do not reflect such exciting growth. In fact, its ballooning operating expenses far outweigh its improved revenue. Indeed, its net profit more than halved to RM22.5 million from RM46.05 million a year ago.

In a Feb 24 note, Kenanga Research says the latest results mark Pos Malaysia’s sixth consecutive quarterly earnings disappointment — at RM49 million, its 9MFY2016 net profit was down 55% year on year, and at 48% of Kenanga’s net profit forecast and 60% of consensus expectations.

Not surprisingly, the postal company’s stock has fallen more than 50% from a year ago to RM2.15.

 Pos Malaysia is trading at a trailing PER of 17 times, in sharp contrast to courier service provider GD Express Carrier Bhd (GDex), which is trading at a trailing PER of 78 times, a price that the Tokyo-based Yamato just paid for a substantial 22.8% stake in the company. In fact, GDex’s share price has rebounded from a low of 85.5 sen in August last year, after the worldwide rout, but not Pos Malaysia.

On the other hand, the steep fall in the postal company’s share price may have prompted investors to wonder if this was an opportune time to invest in it, considering its clean balance sheet that has net cash of RM359 million or 66.9 sen per share.

Indeed, its shares are trading at a small premium to its net asset value per share of RM2.05 as at Dec 31, 2015.

Hong Leong Investment Bank analyst Daniel Wong says GDex’s valuation is probably due to its high-profile shareholders while Pos Malaysia’s continuous struggle stems from its continued underperformance.

Another concern for Pos Malaysia going forward is the planned acquisition of KL Airport Services Sdn Bhd (KLAS).

Says Kenanga Research, “Pos Malaysia could see a massive EPS (earnings per share) dilution if the offer to acquire KLAS from DRB-Hicom goes through.”

The need to acquire KLAS is debatable, given that the airport support services provider earned an average net profit of RM16.8 million from FY2011 to FY2015.

To recap, Pos Malaysia has accepted a conditional offer from its major shareholder, DRB-Hicom Bhd, to inject the latter’s logistics operations, KLAS and a parcel of land into the postal group for RM835.16 million. In return, DRB-Hicom will be issued with 250.8 million new shares in Pos Malaysia at RM3.33 apiece.

With Pos Malaysia’s falling share price, it is uncertain if the issue price will be revised later.

Based on KLAS’ FY2015 pre-tax profit of RM7.2 million, Kenanga Research says the offer price values the company at more than 100 times PER. Based on a projected corporate tax growth rate of 25% and 30% a year, Pos Malaysia FY2017’s net profit would be enhanced by 7% but the EPS dilution would be about 30% to 40%.

According to the latest financial results, Pos Malaysia’s revenue rose 16.87% to RM1.284 billion in the nine months ended Dec 31, 2015, from RM1.099 billion in 9MFY2015. Net profit, however, shrank due to higher operating expenses, driven by a jump in the transport cost for the transshipment business and a one-off recognition of expired postal orders amounting to RM25.5 million in the previous corresponding period.

Revenue generated by the courier segment grew 15.26% from the previous corresponding period to RM421.55 million but net profit in 9MFY2016 stood at only RM51.51 million compared with RM78.39 million in 9MFY2015. The 34.3% decline raises concerns about the efficiency of the postal group and this is even before the new minimum wage kicks in.

In November last year, Pos Malaysia CEO Datuk Mohd Shukrie Mohd Salleh was reported as saying, “Recently, the government announced a new minimum wage, which will impact all players in the industry. Our side no doubt will be impacted as well. We are a very labour-intensive organisation with almost 18,000 workers. So this sort of announcement will have a ripple effect because of manpower.”

So, should the new minimum wage kick in, will Pos Malaysia find it more challenging to manage its costs?

The latest earnings tell us that the postal group’s margins are likely under pressure.

Recall that the UK-based courier company City Link went bust on Christmas Day in 2014. It was a parcel deliverer that should have scored a bonanza, thanks to a growing online shopping trend, but with operating expenses piling up, the business eventually went into administration and stopped accepting parcels on Christmas Eve that year. City Link was loss-making for several years and one of the key areas where it failed was to reduce its cost base.

While it is unlikely that Pos Malaysia will face the same situation, its thinning margin due to increasing operating expenses is a concern that needs to be looked at seriously. 

All said and done, it may not be fair to compare the postal group with a courier service company. The former has a social duty to perform and a snail mail operation that is facing declining volume and thin margins.

Its well-established infrastructure and network have made it possible for it to ride the rapidly growing e-commerce industry but for this to be reflected in its earnings, it needs to commit to cost management. 

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