POS's 9MFY24 results disappointed on poor cost containment.

Despite broadly stable revenue for 9MFY24, core net loss expanded 62% YoY as the gradual improvement in postal and logistics segment from the trough was eclipsed by the high-cost operating environment while its aviation segment recovered strongly on booming air freight sector. We widen our FY24-25F net loss by 13-81%, respectively, reduce our TP by 17% to RM0.25 (from RM0.30) and maintain our UNDERPERFORM call.

POS's 9MFY24 core net loss of RM124.1m came in wider than our expectation at 87% of our full-year forecast. We have sole coverage on the stock. The key variance against our forecast came from its inability to contain operating expenses.

YoY, POS's 9MFY24 revenue fell marginally by 1% with decrease in demand for its postal service (-6%) and logistics services (-17%) offset by stronger showing from aviation (+28%).

Its postal sales continued to be affected by slowdown in online shopping and lower demand from major e-commerce players that were investing in in-house delivery capabilities (for instance, Shopee Express of Shopee). Moreover, its logistics sales were weighed down by unfavourable business environment.

Meanwhile, its aviation sales continued to recover on the back of the booming air freight sector coupled with the resumption of umrah charter flights (which also boosted in-flight catering services).

All in, its 9MFY24 core net loss expanded by 62%.

QoQ, POS's 3QFY24 revenue rose 4% driven by postal business (+0%) on improved parcel volumes, logistics services (+4%) as it is pursuing new business opportunities and expanding its market share in the automotive sector and aviation (+11%) as mentioned above. All in, its 3QFY24 core net loss was reduced by 12%.

Forecasts. We widen our net loss forecast for FY24 and FY25 by 13% and 81%, respectively, from its inability to contain operating expenses despite improving business environment in the 3Q (i.e. logistics segment incurred forex loss of RM10.4m in the 3Q).

Valuations. We reduce our DCF-derived TP by 17% to RM0.25 from RM0.30 based on unchanged discount rate equivalent to a WACC of 6.2% and a terminal growth rate of 0%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We are cautious on POS due to: (i) its conventional mail business that is struggling to turn around in the digital age, (ii) its declining courier volume as incumbent POS has to face tremendous competition from new players such as J&T Express and Ninja Van that undercut aggressively on rates to grow their market share, and (iii) its cost-cutting measures being insufficient to counter its weakening core business revenue. While we applaud its recent venture into "POS Shop" convenience stores through transforming its existing POS stores (currently 31 stores and target of 50 new stores in FY24), we are concerned on the gestation period of the stores to achieve operational efficiency. Maintain UNDERPERFORM.

Risks to our call include: (i) the privatisation of POS at a premium over the market price, (ii) the return of profitability as cost rationalisation efforts finally pay off, and (iii) POS emerging stronger post the consolidation of the courier service segment after weak players are eliminated.

Source: Kenanga Research - 21 Nov 2024