CIMB Research retains Add for DRB-Hicom, target price RM1.69

Pos Malaysia to help deliver stronger earnings for DRB-Hicom

KUALA LUMPUR: CIMB Equities Research has retained its Add call for DRB-Hicom with a sum-of-parts based target price of RM1.69, which is 10% below its realised net asset value (RNAV).

It said there is potential upside to earnings if the proposed postal tariff hikes, as proposed by its 53.5%-owned Pos Malaysia, gets the green light. 

“Our Add call is supported by the imminent foreign partner for Proton and better performance in the services division. Key downside risks are no foreign strategic partner for Proton and further deterioration in Proton’s earnings,” it said..

The national postal services company held an analyst briefing that was attended by about 40 analysts. Key takeaways: a) management hopes to obtain approval for postal rate hikes in FY3/17, b) courier segment should continue to benefit from the growing demand of ecommerce, and c) management is confident of achieving its FY3/17 cost savings target.

“Pos Malaysia’s proposed postal tariff hikes are still pending government approval and management is targeting approval in FY3/17. Meanwhile, courier delivery rates for walk-in customers have been raised by 90 sen across the board. 

“Based on channel checks, the new PosLaju rates for a 1kg parcel for delivery within Peninsular Malaysia are still
c.50% lower than its competitors, such as GDex and City-link. Pos Malaysia previously indicated that the courier segment is expected to overtake the mail segment in the next one to two years,” it said.

In its 1HFY17 results, courier segment revenue rose 22% on-year, driven by growth in e-commerce. The segment contributed 40% of Pos Malaysia’s total revenue in 1HFY17 (vs. 34% in 1HFY16). In line with the growth, it plans to expand its processing facility (currently housing PosMel and PosLaju), which will double its capacity to c.300k items per day.

“Management indicated that the process of shifting deliveries from mail to courier will only happen as and when mail 

“Its acquisition of POS Aviation (previously known as KLAS) will transform Pos Malaysia into an integrated logistics services provider for traditional and e-commerce markets. However, due to a rebranding exercise for synergy, which will incur capex and expansion costs, we do not project a positive earnings contribution in the short term.

“DRB-Hicom consolidated Pos Malaysia into its balance sheet following the acquisition completed in Sep 2016, and
recognised a re-measurement loss of RM130.2m of its initial investment in Pos Malaysia.

“Pos Malaysia’s 1HFY3/17 net profit grew by 47.2% due to a better performance from the courier segment, which posted stronger operating profit growth of more than 100%, despite the swing to losses for the postal services segment. 

“This was due to cost saving measures, such as better rental rates, and the ability to negotiate better contract terms following the consolidation of Pos Aviation and Pos Logistics (formerly KLB), an end-to-end solutions provider (from transporting goods from sellers to last mile delivery to purchasers),” it said.