Pos Malaysia - Eyeing Middle East Courier

THE BUZZ

At Pos Malaysia’s 20th AGM yesterday, management said the company is currently in talks  to  acquire  a  courier  company  in  the  Middle  East  to  diversify  its  business,  in  line with its five-year transformation plan. CEO Datuk Khalid Abdol Rahman said the group aims to conclude the talks by year-end.

OUR TAKE

Why  Middle  East?  As  POSM  has  the  experience  and  the  expertise  in  the  domestic courier segment, we believe that they will likely venture into the region’s domestic courier  segment  rather  than  the  international  segment.  We  understand  that  there  are many  courier  companies  operating  in  the  Middle  East  including  the  international  big boys,  such  as  DHL,  Fedex  and  UBS,  as  it  is  an  emerging  region  with  healthy  GDP growth. We  expect  increasing  demand  for  the  courier  services  in  the  region  in  view  of resilient  growth  in  its  economic  activities. The regions’ most popular  courier  company,
Aramex,  has  been  registering  a  CAGR  of  5%  in  revenue  since  2008  to  2011.  Even during the 08-09 financial crisis, Aramex’s revenue was only slightly impacted, down by 5%.  In  addition,  the  Middle  East  region  has  recently  emerged  as  one  of  the  fastest growing consumer markets.

No surprise. We are not surprised with this piece of news as we have long hinted that there is high possibility of the postal group being involved in M&As relating to the courier segment  as  we  believe  it  is  committed  to  gaining  an  even  bigger  market  share  to safeguard its pole position. As we mentioned in our 20 Feb 2012 report, “There’s Good News in The Mail’, the group’s PosLaju remains the nation’s leading  courier  service provider, with its share of the domestic market enlarging from 22% in June 2011 to 28% in Dec 2011. We are positive on the group’s healthy market share growth, improvement in the provision of logistics services, robust parcel shipment nationwide, especially in the Klang  Valley  due  to  resilient  domestic  consumer  spending,  and  the  benefits  from  its route optimization plan. 

Appropriate  pricing  likely.  While  the  group  did  not  indicate  which  Middle  East company  it  is  eyeing,  we  believe  the  acquisition  is  likely  to  be  at  an  appropriate  price. That said, we believe this acquisition is not likely to cause the company’s capex to bloat. (Note  that  POSM  had  earlier  guided  for  capex  of  RM100-RM150m  p.a  for  FY13,  of which  the  bulk  would  be  investment  in  its  IT  system  and  to  refurbish  its  postal  outlets nationwide).  We  believe  the  group  has  been  careful  in  planning  for  capex  in  order  to fulfill its commitment to pay good dividends at the minimum payout ratio of 35% of PAT. Furthermore,  considering  its  huge  cash  pile  of  RM544m  or  net  cash  per  share  of RM2.03 as of 31 Mar 2012, we are positive on the group’s ability to pay the usual dividend even if it were to increase its capex to RM200m p.a over the next 5 years. This may be to fund its acquisitions, land development and consolidate its remaining 27 Mail Processing  Centres  (MPCs)  throughout  the  nation  to  7  MPCs  over  the  next  5  years  to manage its  new  mail  products  such  as  Direct  Address  Mail (DAM),  provided  by  names such as Deutsche Post, SingPost and Japan Post and which is gaining popularity in the developed  countries.  Instead  of  publishing  their  ads  in  the  newspapers,  these advertisers can send their advertisements through mail directly to target customers. 

While  we  see  the  DAM  service  at  least  helping  to  mitigate  the  impact  of  the  decline  in  mail  volume  going forward,  we  are  not  including  any  potential  earnings  from  this  business  at  this  juncture,  pending  clearer visibility of its performance.

Valuations & Recommendations

More synergies to emerge. Maintain BUY. We reiterate our BUY call on POSM, with an unchanged FV of RM4.14,  based  on  our  SOP  valuation,  which  for  now  which  takes  into  account  the  value  of  five  land  plots directly owned by POSM (as shown in Table 1) and a 10x FY12 PER. We expect more synergies between DRB-HICOM to emerge, in the form of: (i) the high possibility of DRB-HICOM eventually unlocking the value of the five land plots, as management has hinted that it is currently working on a plan for its land, especially the one in Brickfields, which is non-FLC land, (ii) expectations of a bigger contribution from PosLaju to group earnings by leveraging on one of the two license holders in Malaysia providing ground handling services to foreign airlines, namely DRB-HICOM’s Kuala Lumpur Airport Service (KLAS), to further enhance its already lucrative courier business, which contributed 21% of revenue in FY12, and (iii) POSM’s tie-up  with  Bank Muamalat  and  Uni-Asia  Life  Insurance,  which  will  boost  the  retail  segment  by  way  of  high  margin  fees  for OTC transactions at postal outlets, apart from the existing shared banking services (SBS) provided on behalf of RHB and Maybank. We are also positive on POSM’s Ar-Rahnu  business,  for  which  the  services  will  be rolled at POSM’s 50 POs in FY13. We are also positive on the group’s upcoming 1QFY13 results, which are scheduled  to  be  announced  on  14  Aug  2012,  which  we  expect  to  be  in  line  with  our  forecast.  All  in,  we maintain our present FV of RM4.14. Maintain BUY.

Source: OSK