Pos’ 1QFY12/19 core net loss of RM9.7m was higher than our loss forecast at 35% and but within consensus at 24%. The weaker than expected results was mainly due to weaker than expected contributions from postal services and international segments. We are cautious on the near-term outlook of Pos as we believe it will continue to be dragged by its contraction in mail volume and high fixed cost structure. The proposed tariff rebalancing is still hushed and we reckon it will happen later rather than sooner despite the recent “grapevine talk” about obtaining postage hike in the near term. We downgrade our recommendation on Pos to SELL with lower TP of RM1.29 (from RM1.36) to reflect the revision in our BVPS.

Below expectations. Pos’ 1QFY12/19 core net loss of RM9.7m formed 35% of our initial 12M full year loss forecast and 24% of consensus. The weaker than expected results was mainly due to weaker than expected contributions from postal services and international segments. Note that Pos changed its FYE from Mar to Dec, making this year (i.e. FY12/19) a 9M financial year.

QoQ. Revenue dropped by 3.7% to RM573.0m (from RM594.7m) due to lower contribution from postal services (-19.5%) segment as a result from continuous decline in traditional mail volume. Nonetheless, core net loss narrowed to RM9.7m (from RM35.6m) mainly due to higher EBIT contribution from courier, logistics, and aviation segments, following the improved sales QoQ.

YoY. Revenue decreased by 3.0% to RM573.0m (from RM590.5m) due to lower contribution from postal services (-11.2%) and aviation (-8.9%) segments. Furthermore, 1QFY12/19 registered a net loss of RM9.7m as compared to net profit of RM4.2m in 1QFY03/19 mainly dragged by disappointing postal services and international segments.

Outlook. We are cautious on the near-term outlook of Pos as we believe it will continue to be dragged by the contraction in mail volume, high fixed cost structure, Universal Service Obligation (USO) costs and stiff competition in their courier division against a backdrop of the e-commerce boom. The proposed tariff rebalancing is still hushed and we reckon it will happen later rather than sooner despite the recent “grapevine talk” about obtaining postage hike in the near term. We believe any improvements in operational efficiency from the initiatives set out by management will go through a gestation period before contributing positively in the longer term.

Forecast. Following the announced change in financial year end to Dec effective 2019, we have revised our forecasts accordingly. We now expect RM33.1m loss for 9M period of FY12/19 and taper down to RM23.0m loss in FY20, before turnaround profit of RM12.2m in FY21.

Downgrade to SELL with a lower TP of RM1.29 pegged to an unchanged 0.6x P/B multiple (but lower BVPS from the losses). We value Pos at a 40% discount to its BV in view of continued losses in the near term coupled with a persistent challenging operating environment. Any improvements in Pos’ high fixed cost structure will only be apparent in the longer term while shorter term earnings will continue to be hampered by margin compression. Pos’ share price has rose 18.4% since our last TP due to “grapevine talk” about obtaining postage hike in the near term. However, we reckon that this tariff hike will only be an ephemeral victory at best while the structural issues of declining mail volume and high USO cost will persist. With the share price run up (albeit a recent retracement), we reckon that investors should take this opportunity to sell into strength. Upside risks to our call include short term positive sentiment should the tariff hike play out.

Source: Hong Leong Investment Bank Research - 27 Aug 2019