By Emmanuel Samarathisa

POS Malaysia Bhd needs to start delivering profits. The national mail delivery service group recently marked its fifth consecutive quarter in red ink. And workers’ unions, of which there are seven, are becoming restless.
“They need to raise the postage rate. We are afraid that if the rate remains unchanged, our livelihoods might be at stake,” says a union member. The last rate hike to 60 sen for a standard 20g mail was in 2010. Back then the deal was an increase every three years. But that never materialised.

Analysts covering the stock believe that a tariff increase would help Pos Malaysia turn around its fortunes. But they are divided over whether this would be a long-term solution.

“It will improve the group’s bottom line but only for the short term. In the long term, it will trigger a further decline in mail volume.

“Note that their snail mail (segment) comprises commercial customers. Many have already transitioned to e-mail. Another hike would mean no more customers left,” an analyst tells FocusM.

Rakuten Trade vice president Vincent Lau argues otherwise. “There might possibly be a drop in volume, but overall this should be a net positive as you need to factor in rising costs. That has dragged Pos Malaysia for a while. So the hike is a net positive for the group’s balance sheet.”

High operating costs

Pos Malaysia’s major revenue generators are courier and postal services. Courier is the largest contributor, making up roughly 38% of revenue. For the quarter ended Sept 30, 2019, the segment recorded a slightly higher revenue of RM424.6 mil compared to RM423.6 mil for the same quarter last year. Contract customers were the main reason for the marginal improvement.

Its second-largest segment, postal services (about 26% to revenue), registered a lower turnover of RM294 mil compared to RM329.3 mil. Pos Malaysia, in a Nov 25 bourse filing, blamed the “continuous structural decline in traditional mail volume” to e-mails.

But its operating costs have dragged the group. Pos Malaysia, which recently changed its financial year to Dec 31, registered a net loss of RM29.34 mil for the three months ended Sept 30.

But its sales and operating expenses clocked in higher at RM578.27 mil for the quarter against revenue of RM549.99 mil.

The group has two problems here. First, it has to deal with a 23,000-strong workforce where the mailmen and certain segments of the staff are unionised.

Second, Pos Malaysia has a universal service obligation (USO). What this means is the group has to maintain and expand its traditional mail distribution in tandem with new postal addresses.

Maintaining the USO has put the group in a quandary: it has to either add more work for its existing mailmen or add headcount. But the latter may come off as a further burden to the group as traditional mail volume is low.

According to Bloomberg, six analysts cover the stock with five sells and a hold. The last 12 months saw investors lose 24% on the stock.

Return potential is expected to remain negative as Bloomberg predicts a further loss of 6.4% in the next 12 months.

Those from the sell camp sing the same tune. “We remain cautious on the near-term outlook of Pos Malaysia as we believe it will continue to be dragged by the contraction in mail volume, high fixed cost structure, USO costs and stiff competition in their courier division against a backdrop of the e-commerce boom,” Hong Leong Investment Bank analyst Nazira Abdullah writes in a Nov 29 note.

AmInvestment Bank Bhd, which has maintained a sell call, notes that Pos Malaysia’s outlook “remains bleak” over the short to medium term. “The postal segment will suffer from cost inefficiency as the mail volume is on the decline while operating costs keep rising,” it says in a Nov 29 research note.

The research house also poured cold water on hopes that a tariff hike would benefit Pos Malaysia in the long run. “If it happens, it would only be a temporary relief. Meanwhile, the courier segment continues to face price and cost pressures which are eating into its margins, as the sector is weighed down by the overcrowding of participants (116 courier licence holders as of Nov 2019) and there is no sign of consolidation happening soon,” AmInvestment adds.

Kenanga Research analyst Raymond Choo Ping Khoon believes structural difficulties would mar Pos Malaysia’s comeback. “Given Pos’ inability to close down post offices, coupled with its unionised workforce and losses in its postal services segment, losses are only expected to continue moving forward,” he writes in a Nov 29 note.

Rough years ahead

But it seems that the government is dragging its feet over the postage rate hike, says a fund manager. “Postal services licensing falls under the Postal Services Act 2012, which comes under the Malaysian Communications and Multimedia Commission (MCMC). It has mentioned a few times that a raise is in the pipeline. But we are still here talking about the same thing.”

Communications and Multimedia Minister Gobind Singh Deo, whose ministry MCMC reports to, has said that an announcement on a possible postage rate hike could be announced as early as Oct 7.

“We are looking at something right now. Once I get the report, I will hold a press conference on this,” he told reporters on Sept 13. But that failed to materialise.

Pos Malaysia, however, is expecting that the tariff hike would be implemented sometime in early 2020. “The change in the global postal landscape has urged us to seek an urgent postal tariff regulation review from the government, which is expected to materialise by early 2020,” Pos Malaysia group chief executive officer Syed Najib Syed Md Noor said in Nov 26 bourse filing.

National newswire Bernama on Dec 12 quoted a source as saying that Pos Malaysia has received a letter confirming the approval for the tariff hike. But the source added that the group had yet to obtain official details on the rates and implementation date.

But if the hike fails to take off in 2020, Pos Malaysia will have to rough it out for the next couple of years. “If Pos is unable to raise rates (in 2020), my estimates see the group breaking even only in FY2021.

“But again, you are going to see a short-term remedy; it is not a panacea to the problems Pos is facing. Ultimately, it should change its business model, make it more cost-efficient and, perhaps, look at ways to implement staff rationalisation where appropriate,” says an analyst. – Jan 4, 2020

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