• Upgrade to TRADING BUY from Neutral, with a higher DCF-derived TP of MYR1.70 from MYR1.40, 18% upside. Our TP implies 0.82x FY20F P/BV, or -1.5SD valuation. Following Pos Malaysia’s hike of its postage rates, we expect the group to stage a turnaround in profitability over the near term.

• First postage rate revision since 2010. The postage rate revisions – beginning 1 Feb – mainly apply to commercial customers (95% of mail user base), with stamp rates for commercial mail more than doubling to MYR1.30 (from MYR0.60), while remaining unchanged for personal and non-commercial mail users at MYR0.60. Other categories saw rate hikes include commercial registered mail (from MYR2.20 to MYR3.10), non-commercial registered mail (from MYR2.20 to MYR2.40), as well as commercial private letter boxes (from MYR50.00/year to MYR200.00/year). International postage rates for parcels weighing <2kg are also set to rise by up to 30%, following the Universal Postal Union’s Extraordinary Congress in Geneva which gave rise to an increase in last mile delivery costs for small parcels of up to 30% beginning Jan 2020 (with a further 210% increase in the US beginning July 2020).

• Stymying losses. Following the rate revisions, we expect Pos Malaysia to return to profitability in FY21F, boosted by a turnaround in earnings for its postal services and international businesses, which registered segmental losses of MYR115.7m and MYR16.0m in 1HFY20 respectively. We believe the impact on mail volume decline would not overshoot relative to current trends, given the relatively minimal cost base for commercial customers.

• Dividend prospects also improving. With the envisaged improvement in free cash flows, we also expect POS Malaysia to resume its payout of dividends starting from FY21F onwards (FY19: 4sen).

• Looking attractive, still trading below book value. At 0.69x FY20F P/BV representing -1.8SD below its 5-year average, we believe there is upside to the stock given its undemanding valuations, while the near-term earnings outlook has improved substantially. The latter should ease some investor concerns on its debt position and capex commitments necessitated for long-term growth.

• Upgrade to TRADING BUY (from Neutral). We impute heavier losses of MYR86m (from -MYR75m) for FY20F on higher operating costs, but raise FY21F-22F forecasts by 162-168%, based on improved top-line and margin assumptions following the price hikes. Our TP is subsequently raised to MYR1.70 (from MYR1.40) after rolling forward our valuation horizon to FY21F and lowering our WACC to 9.7% (from 10.2%). Downside risks are larger-than expected mail volume declines and higher-than-expected operating costs

Source: RHB Securities Research - 3 Mar 2022