KLAS’ capex may affect Pos Malaysia’s diEarnings prospects remain weak for O&G companies

by **Cals** Tue 22 Mar 2016, 01:35

KLAS’ capex may affect Pos Malaysia’s diEarnings prospects remain weak for O&G companies

By Hong Leong IB Research / The Edge Financial Daily | March 21, 2016 : 10:35 AM MYT

This article first appeared in The Edge Financial Daily, on March 21, 2016.

[size=12][You must be registered and logged in to see this image.]Pos Malaysia has a strong net cash position of RM500 million, which will be utilised to finance its own capex of RM200 million for FY17.

Pos Malaysia Bhd
(March 18, RM3.07)
Maintain hold recommendation with an unchanged target price (TP) of RM2.40:Earnings for the nine-month period ended Dec 31, 2015 (9MFY16) were mainly affected by the trans-shipment business and staff costs (higher on the back of collective agreements with Pos Malaysia Bhd’s labour union, which is estimated to cost an additional RM25 million per annum).

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Trans-shipment contributed RM125 million to 9MFY16, versus RM35 million for 9MFY15. However, the net margin was low at 2% to 3% (versus expectations of 8% to 10%), mainly due to ringgit depreciation (as revenue was charged in ringgit, while the cost structure was in the special drawing rights basket of foreign currencies). Management managed to renegotiate for US dollar-denominated sales, which will improve its margins going forward. However, business volumes may slow down given the higher effective pricing in US dollar. Management regarded the acquisition of the KL Airport Services Sdn Bhd (KLAS) group, including Konsortium Logistik Bhd (KLB), as an important part of its strategic future growth plan to become a key total logistic solution player in the country.

The effectively lower acquisition price of RM589.8 million (based on RM2.40 per share versus the originally quoted RM3.33 per share) reflects DRB-Hicom Bhd’s commitment and confidence in Pos Malaysia’s long-term transformation plan post acquiring and consolidating the KLAS group.

Dilution impact is unavoidable, given the low earnings of the KLAS group of about RM25 million to RM30 million per annum (additional 24.3% to 28% of FY17 earnings) versus an additional share base of 245.75 million (45.8% of existing share base) to DRB-Hicom.

We are positive on the long-term benefits of KLAS’ consolidation and extraction of synergies to diversify and boost earnings potential. However, we expect a gestation period of at least one to two years post consolidation (earnings per share drag), given the capital expenditure (capex) and expansion costs. We maintain our reservation about its execution ability to reap full synergistic benefits from the consolidated entities.
Pos Malaysia has a strong net cash position of RM500 million, which will be utilised to finance its own capex of RM200 million for FY17 ending March 31, 2016, as well as expected capex for KLAS of RM50 million to RM70 million, and RM50 million for KLB. On the other hand, dividend payouts may be affected, another concern for shareholders. Risks include inability to raise postal tariffs, new initiatives failing to mitigate declining mail volumes and a sharper-than-expected decline in mail volumes. We maintain our “hold” recommendation with an unchanged TP of RM2.40, based on 12 times price-earnings ratio for FY17, on the potential earnings drag from the acquisition of KLAS. — Hong Leong IB Research, March 18 [/size]