15th Feb 2014
Pos Malaysia Bhd, best known for having an extensive reach throughout the country, faces the daunting task of carving out a catalyst to maintain its earnings growth.
Since June 2012, it has appreciated more than 120%, peaking at RM6, recorded at end-November last year, as investors bought into its growth story of a rosy earnings outlook due to a hike in postal rates and potential savings from synergies with parent DRB-Hicom Bhd.
With that run-up in its stock price, the company has seen rating downgrades by analysts from research houses, namely HwangDBS Vickers Research and AmResearch, with both recommending a “hold” and citing that the company’s share price has reached fair valuation.
According to data tracked by Bloomberg, the company has a consensus 12-month target price of RM5.90, rated by six research houses. It closed up three sen at RM5.58 yesterday.
“Going forward, there could be pressure on earnings due to staff and transportation costs.
“We estimate these account for 61% and 12% of total operational expenditure.
“Based on our sensitivity analysis, a 5% hike in staff costs would reduce earnings before interest and tax (EBIT) by 7%, and a 5% hike in transportation costs would reduce EBIT by 3%,” says HwangDBS analyst Kevin Wong in a report last week.
Assuming if both cost components increase by 5% each, that would lower earnings by 10%, translating to lower dividend yields.
In short, as interest rates go up due to the possibility of external factors such as the tapering of the US government’s asset purchases, stocks would have to return higher yields to remain attractive.
With an indicative dividend yield of 3% per annum currently for Pos Malaysia, yield-based investors are spoilt for choice in terms of better yielding stocks on Bursa Malaysia and also fixed income instruments.
Chief executive officer Datuk Iskandar Mizal Mahmood, when contacted by StarBizweek, says the company is busy executing efforts to put in place operational efficiency that will propel Pos Malaysia to the next level.
“We also have plans to introduce new products that we hope will excite the industry,” he says.
Iskandar was appointed in July last year following the departure of Datuk Khalid Abdol Rahman who resigned as CEO of Pos Malaysia in February 2013 to return to DRB-Hicom Bhd to head the corporate planning and business development division.
DRB-Hicom acquired a 32.3% stake in Pos Malaysia from Khazanah Nasional Bhd at RM3.60 per share or RM622.79mil in 2011.
Statistics from the Universal Postal Union indicates that global revenues from traditional postage and mail are on a decline by 10% per annum.
However Pos Malaysia is enjoying growth in top and bottom line due to its diversified revenue streams.
“Pos Malaysia has a 14% market share of the RM2.2bil international courier shipment business which is dominated by international players like FedEx and DHL.
“The growth is there in the courier business, but, the key catalyst would be from transhipment that has not been highlighted before,” says an industry observer.
“Currently, Singapore does about transhipment of about 20 tonnes daily, and Malaysia is poised to take a slice of that pie,” he says.
According to some internal data, Pos Malaysia also control about 38% of the domestic courier business which has a turnover of RM800mil annually, and newer products to leverage on e-commerce has drive an up-tick in business too.
Analysts believed that the company would warrant a re-rating only if it concludes a compelling acquisition.
The company have been in talks to acquire a potential Middle Eastern company since last year, however nothing had materialised from the discussion.
Besides M&As being a catalyst, Pos Malaysia is also set to unlock value from its strategic landbanks via redevelopment, including the prized KL Sentral land.
However, the rest of Pos Malaysia’s land or about 95% of it belongs to the Government, as it is under a long lease and falls under the jurisdiction of the Federal Lands Commissioner (FLC).
Fully valued?
At its current share price, Pos Malaysia is now trading at roughly 15 times to its financial year 2015 forecast earnings per share, inline with its global peers like United Parcel Service, Fedex Corp and Deutsche Post that are trading at 15 times to 17 times to their respective financials.
“The past growth have been driven largely by multiple expansion and also earnings.
“With its five-year transformation plan, growth would still be there.
“However, a major catalyst would be the acquisition of potential targets to synergise with its current operation,” says another analyst.
While it is refraining from a buying spree, it is still sitting on a huge growing cashpile of about RM492mil as at Sept 30, 2013 and part of it is expected to be used as capital expenditure to roll out its Ar-Rahnu business.
With a wide network of 697 outlets, Pos Malaysia is by far the company with the most extensive reach throughout the country, even larger than the penetration of local banks.
It also controls the country’s postal service, with no competitors near its turf.
It also currently has about 100 outlets set up with the Islamic pawnbroking business, Ar-Rahnu, and is expected to add more outlets this year.
AmResearch analyst Wong Joe Vuei says the Ar-Rahnu business typically undergoes a gestation period of six to twelve months, which should thereafter contribute positively to the its bottom line.
“Management had further emphasised on its cash requirements for capital expenditure (estimated to be RM300mil in 2013), and for its Ar-Rahnu operations which is cash intensive for disbursements,” says Wong.
The company had also allowed the Section 108 tax credit balance amounting to about RM200mil to expire on Dec 31, and is expected to use this money for operations expansion, instead of declaring a special dividend.
Pos Malaysia’s net profit grew by 22% to RM82.6mil from RM67.2mi for its first half ended Sept 30, 2013, while revenue climbed some 10% to RM672.7mil from RM611.7mil previously.
Its courier segment continued to be the key growth area, with a 54% growth recorded for its operating profit in the period under review, mainly driven by a boost in online transactions which resulted in a rise in on-demand customer revenue, as well as increased contract customers, parcels and prepaid items.
From financial year 2010 to 2013, the group’s overall revenue expanded at an average of 12% per annum, driven largely by the courier segment.
Pos Malaysia is now in the middle of its five-year transformation plan to double its revenue and net profit by 2017.
[Source]
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