POS Malayisa - Rejuvenate business model

Price: RM2.15
Target Price: RM3.25
Recommendation: BUY

· POS to revive the mailing business and operation turnaround for higher yield in 2010. We met with the management recently and we are quite comfortable with the management overview on the business turnaround to promote higher efficiency. It is quite promising outlook for POS in FY10 when the implementation kicks in and to clinch with new business venture with strategic partners to boost up its retail segment.

· New Mail Processing Centre (MPC) in 4Q10 to improve operation efficiencies. The new MPC is expected to be in operation by 4Q10 with estimated cost up to RM250m including land and building. It will replace the existing mail centres that serve for Klang Valley area. Upon completion of the new MPC, it will be 60% automated compared to 25% currently. We envisaged the initial outlay of the investment would be minimal, cushioned by proceeds from the disposal of the existing centres.

· Promotes new retail services to leverage on its wide spread post offices in Malaysia. POS launched its new service recently: the 3rd party insurance cover services, in collaboration with its strategic partner, Malaysian Motor Insurance Pool (MIMP). At present, POS is in the midst of finalising the commission entitlement for this service with MIMP which is capped at 10% of the insurance premium. Apart from that, the management is also in talks with local banks to extend over the banking service of micro credit disbursement through the post offices.

· The earnings catalyst is in the limelight. Despite of challenging operational conditions arising from fluctuation in fuel prices, the management is in the midst of negotiation with the government for its new postal tariff structure. The last tariff increase was 12 years ago. An increase would just add straight to the bottom line and is a key rerating catalyst.

· Maintaining our BUY call with target price of RM3.25. No change to our earnings and assumptions as we expect the immediate earnings upside will be the new tariff revision as the mail segment weighs 60% of the Group’s revenue. We projected DPS of 5.7 sen capped at 35% payout for FY09. The group is currently sitting on the net cash position of 35 sen per share.