AmWatch - Pos Malaysia : Fairly valued for now HOLD, 21 Jul 2014

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Pos Malaysia : Fairly valued for now        HOLD

We downgrade Pos Malaysia (POS) to a HOLD rating with an unchanged fair value of RM5.50/share, based on our DCF valuation. Our downgrade is due to limited upside as the share price has risen close to our fair value. The stock has recovered by 22% to Friday’s close of RM5.40/share, since our rating upgrade in May. Based on its last traded price, the stock is trading at 16x PE FY15F earnings, circa 1SD above its 3 year historical mean.

Mail revenue saw a decent recovery in FY14 (+7% YoY) on the back of increased volume in transshipment. Its direct mail service is also well accepted and experienced good growth, although this only less than 10% to total mail volume currently. The strong performance for the courier segment is expected to remain intact, driven by the robust market for e-commerce.

POS has achieved its target of 100 outlets for its Ar-Rahnu services. The business has yet to be profitable given the average age of its outlets is only circa 6-8 months old. We understand that an outlet could take up to 18 months to break even. Management also indicated that there are no immediate plans to expand its Ar-Rahnu services, and would instead only focus on growing its existing 100 outlets. We estimate a contribution of RM24mil p.a. to revenue upon all 100 outlets turning profitable.

We do not expect a significant increase in dividend payout despite its cash pile of RM439mil, due to cash requirements for capex of RM150-200mil p.a. and requirements of RM1mil-3mil per Ar-Rahnu outlet for disbursements. In the near-to-medium term, the driving force for the business will continue to come from the robust growth of the courier segment on the back of the expanding e-commerce market. We estimate courier revenue to grow by ~20% in FY15 and FY16.

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