In a research report yesterday, Macquarie Equities Research (MQ Research) reaffirmed their outperform rating on Pos Malaysia and revised their target price to RM7.40, a 34.5% jump from its previous target of RM5.50.

Event

• MQ Research reiterates their outperform rating on Pos Malaysia with a revised target price of RM7.40 and remains one of their top GLC reform picks post a meeting with visionary CEO, Dato’ Shukrie. The key takeaway is that management remains focused on taking Pos Malaysia into the digital era as the industry shifts away from traditional mail, and improve asset turnover via its courier business which is a direct beneficiary from the recently launched digital free trade zone. MQ Research’s new target price implies a 19E price earnings ratio (PER) of 23x and they expect the company to deliver a 38% PAT CAGR FY17-20E.

Impact

• Optimizing last mile network. MQ Research continues to commend management’s initiatives to reform itself such as (1) combining its postal and courier delivery network and (2) increasing automation capability to 500k in two years from current 150k capacity, ensuing in increased asset turnover. Capacity at its Shah Alam hub is being increased while a new parcel centre would be built in KLIA. One year into the initiative, MQ Research learned that 30% of its PosLaju (courier) volume is being delivered by its mail postmen, with a 40% target set for 2017. This is an important initiative to increase efficiency and productivity particularly as labour makes up ~50% of total cost and mail volume is in a structural decline.

• Direct beneficiary of digital free trade zone. Pos Malaysia will become the main tenant at the new 20 acre KLIA Cargo Terminal and thus in MQ Research’s view a direct beneficiary of the first phase of Alibaba’s e-fulfilment hub in the digital free trade zone. As Pos Malaysia partners the e-commerce player in its first phase, it could be selected again as the partner in the bigger second phase (up to 90 acres) expected to be launched in 2019. Also, management did not discount the possibility of partnering local airlines in utilizing aircraft belly space, on top of increasing utilization of its current two aircraft fleet.

• Preparing for a digital era. Management is looking forward to the launch of its Digital Mailbox service in 2H17 that would allow users to pay bills, store documents and send mail. It will be equipped with security features such as digital signature. While revenue will be dampened as physical bill volumes decline, the initiative is expected to be earnings enhancing.

Earnings and Target Price Revision

• No change to earnings estimates. MQ Research updates their valuation methodology from a discounted cash flow-base to a PER-base to better capture the strong growth momentum (38% PAT CAGR FY17-20E). MQ Research’s revised target price of RM7.40 (from RM5.50) implies a 23x 19E PER.

Price Catalyst

• 12-month price target: RM7.40 based on a PER methodology.

• Catalyst: courier margin expansion, digital free trade zone news flow, Digital Mailbox rollout

Action and Recommendation

• MQ Research reiterates their top-of-the-street TP of RM7.40 on Pos Malaysia.

Source: Macquarie Research - 12 Apr 2017