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PP 7767/09/2010(025354)

12 April 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e


12 April 2010
MARKET DATELINE

Pos Malaysia Share Price


Fair Value
:
:
RM3.14
RM3.63
More Details On New Postal Tariffs Recom : Not Rated

Table 1 : Investment Statistics (POS; Code: 4634) Bloomberg: POSM MK


Net Core EPS Net
FYE Turnover Profit EPS EPS Growth PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009A 902.6 75.4 14.0 14.0 -6.0 22.4 - 2.1 Cash 9.5 3.2
2010F 1,130.9 141.5 26.4 26.4 87.7 11.9 20.0 1.9 Cash 16.0 3.2
2011F 1,287.0 185.5 34.5 34.5 31.1 9.1 30.1 1.7 Cash 18.3 3.2
2012F 1,388.7 218.8 40.7 40.7 18.0 7.7 37.0 1.4 Cash 18.6 3.2
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Rationale of having postal tariff hike. POSM views that the Government’s Issued Capital (m shares) 537.0
Market Cap(RMm) 1,686.3
recent move to approve postal tariff hike as timely and necessary, as: (1)
Daily Trading Vol (m shs) 0.6
Malaysia has one of the lowest postal tariffs in the world; (2) It needs to 52wk Price Range (RM) 1.99 – 3.36
raise the wages of its employees in order motivate them to help execute the Major Shareholders: (%)
transformation plan. To do this, a review in postal tariffs is required; and (3) Khazanah Nasional 32.2
It requires significant capex to modernise and improve its operating EPF 10.4
efficiency and service quality.
♦ Only part of the postal tariff hike will filter down to POSM’s FYE Dec FY10 FY11 FY12
bottomline. While the higher postal tariffs will boost its financials, POSM EPS chg (%) - - -
stressed that only part of the postal tariff hike will filter down to POSM’s Var to C.EPS (%) 31.8 14.8 10.1
bottomline, as: (1) Higher postal tariffs will hasten mail volume decline; (2)
Share Price Chart
POSM will undertake several measures to ensure that the consumers will not
be burdened by the higher postal tariffs and these measures will partly offset
higher mail revenue arising from the tariff increase; (3) A significant portion
of the tariff hike will go towards bridging the salary gap between POSM’s
employees and their government counterparts; and (4) Part of the postal
tariff hike will also be channeled towards funding its capex, which will in turn
bring up POSM’s depreciation expenses.
♦ Positive on mail volume growth post FY12/11. While its mail volume is
likely to remain under pressure for the next two years (FY12/10-11, mainly
on the back of the move to a paperless environment and higher postal tariffs Relative Performance To FBM KLCI
from 1 Jul 10), POSM is positive that its mail volume will start trending up
from FY12/12. This will be underpinned by its continuous efforts to introduce
FBM KLCI
new products and services to capture rising popularity of e-commerce
activities (that will in turn boost parcel volume in the courier industry) and
the direct mail segment.
Pos Malaysia
♦ Risks. These include: (1) Escalating petrol and jet fuel prices that will put a
dent on POSM’s earnings; (2) Intensifying competition among the courier
companies; and (3) Rising substitution of electronic communications media
that will result in a sharper-than-expected decline in mail volume.
♦ Investment case. We value POSM at RM3.63/share based on “sum of
parts”, which includes POSM’s postal business at 13.6x FY12/10 PER and its
15% stake in Transmile at the 6-month average share price of RM0.655.

Please read important disclosures at the end of this report. Chye Wen Fei
(603) 92802172
chye.wen.fei@rhb.com.my

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Highlights from analyst briefing

♦ Rationale of having postal tariff hike. Pos Malaysia (POSM) views that the Government’s recent move to
approve postal tariff hike (after 18 months of rigorous engagements with the regulator and industry) as timely
and necessary, as:

1. Malaysia has one of the lowest postal tariffs in the world. The low postal tariff will put POSM in a
disadvantaged position compared to its industry peers once the globalisaton of postal industry worldwide
takes place. Also, the low postal tariff will impair POSM’s ability to continously expand the Universal Service
Obligations (USO) requirements;

2. It needs to raise the wages of its employees in order motivate them to help execute the transformation plan.
To do this, a review in postal tariffs (which have been unchanged for the past 18 years) is required given its
deteriorating financial position arising from rising operating costs and declining mail volumes; and

3. It requires significant capex to modernise and improve its operating efficiency and service quality.

Table 2: Details on Postal Tariff Hike Effective 1 Jul 10


Category Weight Current Tariff New Tariff Change
(g) (RM) (RM) (RM) (%)
Standard Mail ≤20 0.30 0.60 +0.30 +100.0
≤50 0.40 0.70 +0.30 +75.0
Postcard - 0.20 0.30 +0.10 +50.0
Non Standard Mail ≤50 0.50 0.80 +0.30 +60.0
≤100 0.75 0.90 +0.15 +20.0
≤250 1.00 1.00 - -
≤500 2.00 2.00 - -
≤1,000 3.50 3.50 - -
≤2,000 6.00 5.50 (0.50) (8.3)
Periodicals ≤20 0.25 0.50 +0.25 +100.0
≤50 0.35 0.60 +0.25 +71.4
≤100 0.50 0.80 +0.30 +60.0
≤250 0.70 0.90 +0.20 +28.6
Printed Matters ≤500 1.50 1.80 +0.30 +20.0
>500–1,000 1.75 3.00 +1.25 +71.4
≤2,000 2.50 4.50 +2.00 +80.0
Parcels (Domestic) ≤1,000 2.50 4.00 +1.50 +60.0
2,000 3.50 5.50 +2.00 +57.1
Every 1 kg thereafter 1.00 1.50 +0.50 +50.0
Registered - 1.40 1.60 +0.20 +14.3
Source: Company

♦ Only part of the postal tariff hike will filter down to POSM’s bottomline. While the higher postal tariffs
(effective 1 Jul 10) will boost its financials, POSM stressed that only part of the postal tariff hike will filter down to
POSM’s bottomline, as:

1. POSM feels that higher postal tariffs will result in consumers shifting to other substitutes (such as e-
statements, emails, etc.) and this will in turn hasten mail volume decline. POSM estimates that the postal
tariff hike effective 1 Jul 10 will result in a 10% decline in mail volume in FY12/10 and FY12/11;

2. POSM will undertake several measures to ensure that consumers will not be burdened by the higher postal
tariffs effective 1 Jul 10. For the “rakyat”, POSM will introduce “Mel Rakyat” on 22 Apr 10, which resembles
an aerogramme and will be priced at RM0.30. To ease the financial burden of the bulk mailers (which
accounted for 70% of POSM’s total mail revenue), POSM is currently considering giving volume discounts.
These measures will partly offset higher mail revenue arising from the tariff increase;

3. A significant portion of the tariff hike will go towards bridging the salary gap between POSM’s employees and
their government counterparts (see Chart 1). Effective from 1 Jul 10, POSM will raise employees’ wages by
11-19% (or an average of 16%) to bring its employees’ wages at least in line with their government
counterparts; and

4. Part of the postal tariff hike will also be channeled towards funding its capex, which is likely to be RM100-
150m per annum over the next 2-3 years.

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Chart 1: Salary Gap

RM

1,600 19% 25%


1,415
1,400 1,285

1,200
1,035 1,057
1,000

800

600

400

200

0
P o stmen Go vernment Staff Co unter Clerks Go vernment Clerks
(N11) (N17)

Source: Company

♦ Positive on mail volume growth post FY12/11. While its mail volume is likely to remain under pressure for
the next two years (FY12/10-11, mainly on the back of the move to a paperless environment and higher postal
tariffs from 1 Jul 10), POSM is positive that its mail volume will start trending up from FY12/12. This will be
underpinned by its continuous efforts to introduce new products and services to capture rising popularity of e-
commerce activities (that will in turn boost parcel volume in the courier industry) and the direct mail segment.

Risks

♦ Risks. The risks include:


1. Escalating petrol and het fuel prices that will put a dent on POSM’s earnings;
2. Intensifying competition among the courier companies; and
3. Rising substitution of electronic communications media that will result in a sharper-than-expected decline in
mail volume.

Earnings Forecasts

♦ Earnings forecasts. We are projecting POSM’s FY12/10 net profit to increase by 87.7% to RM141.5m on the
back of an average 75% increase in postal tariffs (effective 1 Jul 10) that more than offset: (1) A 10% decline in
total mail volumes (that is in line with the management’s projection); (2) An average 16% increase in staff
salaries from 1 Jul 10; and (3) A 30% increase in transportation costs from FY12/09. FY12/11 net profit is
projected to increase by another 31.1% to RM185.5m and this is mainly on the back of the full-year impact of the
average 75% postal tariff hike.

♦ Earnings assumptions. In our forecasts, we are assuming: (1) Average postal tariffs to increase by 37.5% in
FY12/10 and 27% in FY12/11 (that is the full-year impact of an average 75% increase effective 1 Jul 10); (2)
Mail volume to decline by 10% p.a. for FY12/10-11; and (3) Total transportation cost to increase by 30% on the
back of higher jet fuel costs.

Valuation & Recommendation

♦ Investment case. We value POSM at RM3.63/share based on “sum of parts”, which includes POSM’s postal
business at 13.6x FY12/10 PER (in line with its closest peer Singapore Post) and its 15% stake (40.5m shares) in
Transmile at the 6-month average share price of RM0.655 (see Table 3).

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Table 3: “Sum of Parts” Valuation


RMm Assumptions

Postal services business 1,924.6 13.6x FY12/10 net profit, in line with Singapore Post's current PER.
15% Stake in Transmile 26.5 RM0.655 per Transmile share, the average 6-month share price
1,951.1
Issued shares (m) 537.0
RM/share 3.63

Source: RHBRI

Table 4: Earnings Forecast Table 5: Forecast Assumptions


FYE Dec (RMm) 2009A 2010F 2011F 2012F FYE Dec 2010F 2011F 2012F

Turnover 902.6 1,130.9 1,287.0 1,388.7 Volume


Growth (%) -2.1 25.3 13.8 7.9 - Mail (m) 1,110.0 999.0 1,049.0
- Courier (m items) 15.2 17.5 19.2
EBITDA 131.0 224.4 295.9 332.3 - Retail (m transaction) 134.9 136.7 138.7
EBITDA margin (%) 14.5 19.8 23.0 23.9

Other operating
income 24.8 19.3 22.7 26.5
Depreciation &
amortisation -48.6 -47.1 -61.0 -55.0
Allowance for
impairment loss 4.2 0.0 0.0 0.0
Associate 0.0 0.0 0.0 0.0
Finance cost -1.8 0.0 0.0 0.0
Pretax profit 109.5 196.5 257.7 303.9
Pretax margin 12.1 17.4 20.0 21.9

Tax expense -32.8 -55.0 -72.1 -85.1


Minority interest -1.3 0.0 0.0 0.0
Net profit 75.4 141.5 185.5 218.8
Source: RHBRI Source: RHBRI

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

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Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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