PP 7767/09/2010(025354)

31 March 2010

Malaysia Corporate Highlights

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

Com pany Upda te

31 March 2010
MARKET DATELINE

Pos Malaysia Share Price

Recom
:
:
RM2.25
Not Rated
Government To Study & Review Postal Services

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 16.0 - 1.5 Cash 9.5 4.4
2010F 968.5 68.1 12.7 12.7 -9.7 17.7 15.1 1.5 Cash 8.4 4.4
2011F 1,000.8 61.5 11.4 11.4 -9.7 19.7 17.0 1.5 Cash 7.5 4.4
2012F 1,035.4 52.9 9.8 9.8 -14.0 22.8 - 1.5 Cash 6.5 4.4
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Khazanah to divest POSM. The Prime Minister mentioned that Khazanah Issued Capital (m shares) 537.0
Market Cap(RMm) 1,208.3
Nasional, which owns 32.2% of Pos Malaysia (POSM) will:
Daily Trading Vol (m shs) 0.2
1. Divest its stake to new investors in two stages after detailed study and 52wk Price Range (RM) 1.99 – 2.58
review of postal services; and Major Shareholders: (%)
Khazanah Nasional 32.2
2. Raise wages of POSM’s employees.
EPF 11.2
♦ Postal tariff hike is required in order to realise Khazanah’s plan to Permodalan Nasional Bhd 8.5

divest POSM. We believe Khazanah Nasional will only divest POSM upon the
FYE Dec FY10 FY11 FY12
implementation of the transformation plan. To kick start the transformation EPS chg (%) - - -
plan, POSM will need to raise wages of its employees as human capital is the Var to C.EPS (%) -16.0 -32.6 -
main driving force in succeeding the transformation plan. Given its
deteriorating financial position and thus its ability to support 16k staff and Share Price Chart
postal services for 6.0m households as well as the escalating crude oil prices
(that will in turn push POSM’s transportation costs higher), a postal tariff
hike is required to raise its employees’ wages. We note that POSM submitted
a proposal to the Government in late-09 partly to address this issue.

♦ It is unknown as to when POSM will be granted a hike and how much, but
our sensitivity analysis indicates that POSM’s postal tariff will have to
increase by 25.5% across the board in order to raise staff average salary by
30%, assuming FY12/10’s mail volume of 1,196.4m.
Relative Performance To FBM KLCI
♦ Earnings forecasts. We project POSM’s FY12/10 net profit to decline by
9.7% to RM68.1m due to higher operating cost arising from rising staff cost FBM KLCI
and rising transportation cost, which more than offset higher revenue.

♦ Risks. These include: (1) Postal tariff hike comes in lower than expected; Pos Malaysia

(2) Escalating petrol and jet fuel prices that will put a dent on POSM’s
earnings; (3) Rising substitution of electronic communications media that will
hurt mail volume further; and (4) Intensifying competition among the courier
companies.

♦ Investment case. At current price of RM2.25/share, POSM is currently

trading at FY12/10 PER of 17.4x (after having adjusted for POSM’s 15%
stake in Transmile at current share price of 38.5sen), which is relatively
stretched compared to its closest peer Singapore Post. However, we highlight
that there could be further upside in POSM’s share price, if a hike in base
tariffs and automatic pricing mechanism are approved. Chye Wen Fei
(603) 92802172
chye.wen.fei@rhb.com.my
Please read important disclosures at the end of this report.

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 31 March 2010

♦ Khazanah to divest POSM. During the release of New Economic Model (NEM) at the InvestMalaysia 2010
conference, the Prime Minister mentioned that Khazanah Nasional, which owns 32.2% of Pos Malaysia (POSM)
will:

1. Divest its stake to new investors in two stages after detailed study and review of postal services; and

2. Raise wages of POSM’s employees.

♦ Postal tariff hike is required in order to realise Khazanah’s plan to divest POSM. We believe Khazanah
Nasional will only divest POSM upon the implementation of the transformation plan (that is aimed to counter
several key challenges that are faced by the domestic postal industry, such as declining mail volumes and rising
cost pressure). To kick start the transformation plan, POSM will need to raise wages of its employees (that is
about 30% lower than the average government servant’s salary, according to POSM) as human capital is the
main driving force in succeeding the transformation plan. Given its deteriorating financial position and thus its
ability to support 16k staff and postal services for 6.0m households as well as the escalating crude oil prices (that
will in turn push POSM’s transportation costs higher), a postal tariff hike is required to raise its employees’ wages.
We note that POSM submitted a proposal to the Government in late-09 partly to address this issue.

♦ It is unknown as to when POSM will be granted a hike and how much, but our sensitivity analysis indicates that
POSM’s postal tariff will have to increase by 25.5% across the board in order to raise average salaries by 30%,
assuming FY12/10’s mail volume of 1,196.4m. If POSM is granted a tariff hike of 30%, this will boost our
projected FY12/10 net profit for POSM by 27.7% to RM86.9m, assuming both postal tariff hike and 30% upward
adjustment in employees’ salaries happen simultaneously effective 1 Apr 10 (see Table 2).

Table 2: Sensitivity Analysis on POSM’s FY12/10 EPS & PER

Assuming postal tariffs are raised by:
0% 30% 40% 50%
FY12/10 EPS (sen) 12.7 16.2 23.8 31.3
Change (%) - +27.7 +87.3 +147.0

FY12/10 PER (x)* 17.5 13.7 9.4 7.1

Change (x) -3.8 -8.2 -10.4

Fair Value (RM)** 1.76 2.23 3.26 4.29

Change (%) - +26.7 +85.2 +143.6
* After deducting POSM’s 15% stake in Transmile (worth 2.9 sen per POSM share)
** After added POSM’s 15% stake in Transmile (worth 2.9 sen per POSM share) & based on Singapore Post’s current CY2010 PER of
13.6x
Source: RHBRI

Risks

♦ Risks to our view. The risks include:

1. Postal tariff hike comes in lower than expected;
2. Escalating petrol and jet fuel prices that will put a dent on POSM’s earnings, as transportation cost (which
correlates with petrol price) accounts for 12-13% of POSM’s total operating cost;
3. Rising substitution of electronic communications media that will hurt mail volume further; and
4. Intensifying competition among the courier companies.

Earnings Forecasts & Assumptions

♦ Earnings forecasts. We project POSM’s FY12/10 net profit to decline by 9.7% to RM68.1m due to higher
operating cost arising from rising staff cost and rising transportation cost (RHBRI projects FY12/10 crude oil
prices to increase to US$80-100/barrel from US$81.26/barrel currently, which will likely mean higher petrol prices
in FY12/10), which more than offset higher revenue.

♦ Earnings assumptions. We note that our FY12/10-11 net profit forecasts have yet to incorporate the potential
postal tariff hike, as we are unsure as to both the timing and quantum of the postal tariff hike. However, our
sensitivity analysis suggests that the current share price has already implied a 30% increase in postal tariffs (see
Table 2).

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Valuation & Recommendation

♦ Investment case. At current price of RM2.25/share, POSM is currently trading at FY12/10 PER of 17.5x (after
having adjusted for POSM’s 15% stake in Transmile at current share price of 38.5sen), which is relatively
stretched compared to its closest peer Singapore Post (see Table 3). However, we highlight that there could be
further upside in POSM’s share price, if a hike in base tariffs and automatic pricing mechanism are approved.

Table 3: Peer Comparison

Country Ticker FYE Issued Share Mkt Cap EPS (sen) PER (x)
Shares Price
(m) (m) CY2010 CY2011 CY2010 CY2011
POSM Malaysia POSM MK Dec 537.0 2.22 1,208.3 12.7 11.4 17.5 19.4
Singapore Post Singapore SPOST SP Mar 1,926.4 1.08 2,081.0 8.0 8.0 13.6 13.5
* After stripping out POSM’s 15% stake in Transmile (worth 2.9 sen per POSM share)
Source: Bloomberg; RHBRI

Table 4: Earnings Forecast Table 5: Forecast Assumptions

FYE Dec (RMm) 2009a 2010f 2011f 2012f 2010f 2011f 2012f

Turnover 902.6 968.5 1,000.8 1,035.4 Volume

Growth (%) -2.1 7.3 3.3 3.5 - Mail (m) 1,196.4 1,160.5 1,125.6
- Courier (m items) 15.2 17.5 19.2
EBITDA 131.0 122.4 123.6 101.9 - Retail (m transaction) 134.9 136.7 138.7
EBITDA margin (%) 14.5 12.6 12.4 9.8

Other operating 24.8 19.3 22.7 26.5

income
Depreciation & -48.6 -47.1 -61.0 -55.0
amortisation
Allowance for 4.2 0.0 0.0 0.0
impairment loss
Associate 0.0 0.0 0.0 0.0
Finance cost -1.8 0.0 0.0 0.0
Pretax profit 109.5 94.6 85.4 73.5

Tax expense -32.8 -26.5 -23.9 -20.6

Minority interest -1.3 0.0 0.0 0.0
Net profit 75.4 68.1 61.5 52.9
Core net profit 71.2 68.1 61.5 52.9
Source: RHBRI Source: RHBRI

IMPORTANT DISCLOSURES

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

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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.

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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subject to the duties of confidentiality, will be made available upon request.

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