Results

• Slightly above expectations – Reported 1QFY03/17 core net profit of RM29m, accounting for 33.1% of HLIB full year estimate for FY16 and 35.8% of consensus.

Deviations

• Strong recovery in courier margins and exceptional performance from Digicert usage (Others division).

Dividend

• None.

Highlights

• YoY: Core net profit was up by 18.3% YoY to RM29m in 1Q17 due to (i) stronger performance from courier division with revenue up (+24.1%) and better margins registered (ii) better retail profitability due to drop in lower margin transshipment revenue and (iii) stronger YoY growth on Others revenue with high margin Digicert (April/May whereby taxes are due) being the main driver for profits.

• QoQ: 1Q17 core net profit surged by 79.8% mainly driven by (i) recovery in courier revenue (+9.9%) and significant improvement in profitability (EBIT margin 1Q17: 14.5% vs. 2.7% in 4Q16). (ii) reversal of Retail business into the black despite QoQ drop in revenue in line with lower transshipment revenue contribution and (ii) improvement in Others division due to pick up in Digicert demand.

• Comment: PosM continued to be affected by the weakness in convention mail volume, while transshipments business is relatively seasonal and opportune with low margins.

• Courier services demand is expected to improve in the coming years due to e-commerce boom.

Risks

• Inability to raise postal tariff;

• Rebound in crude oil prices;

• New services/products fail to mitigate declining mail volume; and

• Sharper-than-expected decline in mail volume.

• Staff union risks

Forecasts

• We decide to maintain forecasts for now due to erratic movements in Retail and Others division.

Rating

• Hold

• Positives – (1) Plenty of growth opportunities, leveraging on DRB Group and newly acquired Konsortium Logistics; and (2) Strong balance sheet.

• Negatives – (1) Huge staff numbers; (2) High rigid cost structure; and (3) highly regulated industry.

Valuation

Upgrade to HOLD from SELL previously post increase in TP to RM3.01 after an upgrade of our CY17 target PER to 15x (still a discount to its 5-year average) from 12x previously. We see more reason to be more bullish on the stock given its (i) recent rebound in earnings delivery and (ii) strong growing courier business.

Source: Hong Leong Investment Bank Research - 29 Aug 2016