POS Malaysia - OUTPERFORM - 15 JUNE 2012

POS hosted a briefing yesterday and revealed its 5-year business plan with a double-digit revenue growth as the main target for the period of FY13 to FY17. We are positive on the plan as the management is proactively looking to diversify its  earnings from its traditional mail business into retail and courier services. The management is committed to spend RM150m a year in order to achieve the business plan starting from FY13. At the same time, management reiterated that the 35% dividend policy  would be maintained and it is also looking to partly finance its CAPEX via debt. We have tweaked our FY13 earnings higher by 12% as we are now projecting earnings growths for the next two financial years. We are looking at strong revenue contributions from its new business lines i.e. courier, financial services and direct mail in total of about 12% and 20% for FY13 and FY14 respectively. We are maintaining our OUTPERORM recommendation and Target Price of RM3.70 based on DCF valuation. We have also factored in the potential gearing in our FY13 – FY14 forecast.  

Shifting away from traditional mail business.  As the threat from technology is inevitable for its mail business, POS is diversifying its earnings into courier, retail and other financial services (Islamic Pawn Business). In FY12, mail business contributed about 62% of its revenue with a pre-tax margin of c. 20%. However, this margin is not sustainable in the next 12 months due to the high fixed cost and falling mail  volume. The management expects the new business plan to start to contribute to its revenue in FY13.     

Digital solution broadens existing business earnings.  The management will focus on enhancing its digital based resources as the main platform for all of its existing and new businesses, for example, the online interface and communication for retail, courier and financial/insurance services. This will enable POS to capture the demands for such services and to deliver efficiently via its existing network. We expect POS to earn a fee- based income from this segment. There is no further guidance on the expected contribution from this segment for now. We, however, understand that the effort to enhance its digital solution is progressing at this juncture. 

Double-digit growth. More interestingly, the management has set its KPI with a double-digit growth on its revenue. This translates into a RM2.2b mark for its revenue by FY17. We see this as a fairly aggressive target as the new business segment will have to contribute about 22% of its revenue and to grow at a 4-year CAGR of 40%. We, however, are of the view that the higher growth rate for the new business is justified due to declining mail volume. Management reiterated that the impact would likely be seen in FY13 but there was no further guidance on the numbers. 

Risk.  Thus far, the only key risk in the plan is execution. We strongly believe that the execution should be around the corner for an immediate impact to its earnings. 

Change to forecasts. We have imputed in the possible contribution from the new business segment into our FY13 and FY14 forecasts. We have tweaked our FY13 earning higher by 12% and assumed  a CAPEX of RM150m per annum for the next 5 years. 

Maintain OUTPERFORM.  We are maintaining our OUTPERFORM recommendation with an unchanged Target Price of RM3.70 based on DCF valuation.   

Source: Kenanga