Have Pos Malaysia shares run ahead of fundamentals?

POS Malaysia Bhd has been one of the top-performing counters on Bursa Malaysia since the movement control order (MCO) came into effect on March 18.

Seen as a potential beneficiary of the MCO, the share price of the postal delivery and courier services group has almost double over the past seven weeks of the country being in a partial lockdown to contain the spread of Covid-19.

The uptrend appears to have been driven mainly by retail investors, while institutional investors, namely the Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (Diperbadankan), were on a selling mode, taking advantage of the rising share price to offload some of their stakes in the loss-making company.

In fact, the EPF, which had been paring down its shares in Pos Malaysia even before the MCO, ceased to be a substantial shareholder in the company by mid-april.

One analyst notes that the medium term outlook remains challenging for Pos Malaysia although certain segments of the company may have benefited from the MCO.

“While it is true Pos Malaysia has seen an increase in demand for its courier services as well as higher usage of its digital service since the MCO, it does not mean the growth prospects of the group overall have improved,” says the analyst with a local bank-backed brokerage.

“There are still many issues that the company has to contend with.

“These include high operating costs; tight margins amid growing competition in the courier segment as well as declining volume in other segments such as domestic traditional mail and international mail and parcel services,” he explains to Starbizweek.

Hence, he is of the opinion that the counter may have run ahead of its fundamentals after the recent rally.

Pos Malaysia’s shares closed at xx yesterday. This represented a strong rebound from its lowest of 53.5 sen on March 19.

Year to date, however, the counter is still down about 33%, as it had been on a declining trend prior to the MCO amid pessimism over its growth prospects.

Meanwhile, another analyst argues the medium-term prospects for Pos Malaysia will likely remain subdued, but longer-term outlook will likely be “more favourable” if the group’s ongoing transformation plan is successful. “It will take some time to show results. But for now, it will be challenging for Pos Malaysia; the net impact of MCO on the company is largely negative,” he says.

Pos Malaysia is currently undergoing a business transformation process, with a focus on the digitalisation and improving its cost efficiencies.

Among other things, the group has earmarked Rm300mil for the next few years to digitalise its core systems. Nevertheless, the company is not expected to see a financial turnaround any time soon.

Pos Malaysia group chief executive officer Syed Md Najib Syed Md Noor said in a recent media interview that the company was expected to only return to profitability around 2021 to 2022.

Pos Malaysia posted its sixth quarterly net loss of Rm171.1mil, or 21. 86 sen per share, for the three months to December 2019.

That was also the group’s largest quarterly loss, and that was due mainly to a goodwill impairment of Rm90.6mil for Pos Logistics.

During the quarter in review, Pos Malaysia’s revenue fell 4% to Rm559.6mil from Rm581.2mil in the corresponding quarter of the preceding year.

RHB Research says Pos Malaysia will likely remain in the red for the first quarter ended March 31, 2020, and even into the second quarter of the year.

In its recent report, the brokerage says it project a net loss of Rm63mil for Pos Malaysia for 2020, mainly due to revenue loss in light of the MCO being extended to mid-may.

However, it has raised its earnings forecast for the company by 2%-21% for 2021 and 2022 after factoring in higher expected courier volumes while partially offset by a quicker decline in mail volumes due to the underlying shift in industry trends.

“A return to profitability in 2021 is premised on revenue rebounds and margins improvement,” RHB Research says.

Despite expecting Pos Malaysia to be loss-making in the first half of this year, the brokerage maintains its buy call on the counter, citing attractive valuations.

In addition, it has also raised its target price for Pos Malaysia to RM1.10, from 75 sen previously, based on an undemanding 0.8 times forward book value.