POS Turnaround? Sure or Not?

A few years back, courier business especially last-mile delivery was identified as a sunrise business with explosive growth potential due to e-commerce boom.

Now, we realize that the competition in courier business is ferocious and bloody, and its earning growth potential seems to be not that attractive anymore.

Like many other investors, I did consider to invest in courier stocks before. 

GDex is perhaps the best listed courier company but its PE ratio was, and is still extremely high.

POS is the largest courier company in the country but it has a sunset mail business which will drag down its courier profit. 

Nationwide looks hopeless and I have nothing much to say about it.

CJ Century was my only hope as it just started its courier service business in early 2018. However, after 3 years it's still suffering in loss and seems difficult to turnaround anytime soon.

Recently I read a few excellent articles and news regarding the potential turnaround of POS Malaysia. It certainly caught my attention so I did a simple research on the company.

POS is not the type of company I like, as it "feels" complicated and government-linked, similar to MAS which was almost bankrupt and delisted few years ago.

POS recent financial results are not good. It has registered losses for 8 consecutive quarters.

POS lost RM165.8mil in FY2019 (from Apr18 to Mac19). It changed its financial year end in 2019 to Dec19 and from Apr19 to Dec19, its loss widened to RM215.6mil in just 3 quarters.

In the first 6 months of FY2020 from Jan20 to Jun20, it still registered loss of RM68.2mil.

One word to describe it: BAD. It looks on track to another loss-making year.

Nevertheless, there is one thing that is very interesting in its latest FY20Q2 quarterly report. The first sentence in its "Future Prospect" reads: POS Malaysia recorded its first monthly Profit After Tax in June 2020, since January 2019.

It's not EBIDTA or PBT, it's PAT!

June is the last month of its Q2. If the momentum continues, then July, August & September which means Q3 must be profitable? Or is it just a "one month show" in June?

After further research, it looks like a turnaround is not baseless.

First, we need to know why POS is making huge losses since the last 8 quarters. 

Prior to year 2020, POS has 6 reported business segments:

• Postal (mail)
• Courier
• International
• Aviation (cargo & ground handling etc)
• Logistic (total logistic service & warehousing)
• Others (printing & insertion, digital cert & Ar Rahnu)

The bar chart below shows the revenue & operating profit of those 6 business segments in the past 4 years. Please take note that FY20 here refers to the period from Apr19 to Dec19.

From the chart above, we can see that:

• Postal (mail) segment is the main reason for overall poor financial performance with huge losses which widened every single year from RM148.5mil in FY17 to RM201.9mil in FY20, while its revenue dropped every year as expected.
• Revenue in courier segment increased every year as expected, but its operating profit dropped every year alarmingly from RM181mil in FY17 to just RM14.7mil in FY20.
• Revenue and profit from International segment were also in a downtrend which turned into loss in FY19 & FY20.
• Aviation was a new segment in FY18 and contributed consistent operating profit to the group.
• Logistic segment contributed significantly to its revenue but its profit could be ignored.
• Though under "others" segment with lowest revenue, it contributed rather significant and consistent profit to the group.

So, the main reason for POS to turn into red since FY19 is its sudden drastic drop in its most promising segment, which is the courier segment. 

From FY18 to FY19, why did the segment profit of courier drop from RM148.2mil to RM23.4mil? Is it because of pure increase in operating cost, some one-off items or accounting changes? I'm not sure as the management did not explain it clearly.

From its FY19 annual report, there was an impairment in goodwill of RM39.6mil but it was in Logistic segment. There was also an one-off redelivery charge of its leased airplanes of RM44.0mil which should be from the aviation segment.

For its FY20 (from Apr19 to Dec19), the group's overall loss deepened to RM215.6mil in just 9 months, with the profit from courier segment also dropped further to RM14.7mil.

The management explained that again, there was an impairment in goodwill of RM93.9mil in its Logistics and Aviation segment, as well as one-off redelivery charge of aircraft of RM28.6mil. These have nothing to do with its courier segment.

When e-commerce continues to boom, its courier segment continues to have more sales but the profit margin drops. Perhaps this is similar across the whole industry due to fierce competition.

From calendar year 2020 onwards, POS combines its postal (mail), courier and international segment into one "Postal" segment. So we can't see how its courier segment perform anymore.

If the "crown jewel" of POS which is its courier segment does not perform well, how can we expect it to turn the group's fortune around?

But in truth POS has been profitable in June 2020. Why?

For me, there are 3 main reasons it can have a chance to stage a turnaround.

1. Increase in mail postal rates starting from Feb20

The government has agreed to increase the postal rates for commercial mail, registered mail & small parcel below 2kg effective from Feb 2020. The last rate adjustment was in 2010.

It's like an increase in ASP for gloves companies or CPO price for oil palm plantation companies, in which the extra revenue will go straight to its profit before tax as there should be no extra cost incurred.

POS's commercial clients make up 95% of all the mail users in Malaysia, with only 5% are individuals.

According to HLIB, this may generate additional estimated revenue of RM250mil on a full year basis.

According to The Edge report in Aug20 after the release of FY20Q2 result, the increase in postal rates is projected to contribute incremental revenue of RM100mil to RM150mil for the year (year 2020?).

This RM250mil if true, is not a small figure. It can make its mail segment breakeven and turn the group into profit on its own.

2. Better than expected courier growth through SendParcel

SendParcel is an online shipping platform in which customers can check shipping rates online, auto-generate consignment notes and arrange for pick up by POSLaju or drop off at any POSLaju outlets.

It was just launched in Aug 2019 to the public and includes international delivery since Jan 2020. 

It has processed 3.3mil parcels from Oct19 to Jul20 (10 months) with an average of 0.3mil parcels per month. However, according to its CEO in an interview with The Edge in Sep20, MCO has raised its demand and now they are handling nearing 2 million parcels per month!

This might also contribute to its profitable month of Jun20. With the parcels volume expected to keep increasing from July, August & September onwards, a turnaround looks on the cards.

The bar chart below shows segmental performance of POS in year 2020. The mail, courier & international segment have been combined into postal segment.

After the increase in postal rates took effect from Feb20 with 2 months contribution in FY20Q1, the loss in this segment quickly narrowed from about RM118mil in preceding quarter to RM49.9mil.

In FY20Q2, the postal segment has turned profitable with a small profit of RM4.2mil, with full contribution from the increased "ASP" and growing parcel volume.

If not because of the increase in loss in aviation and logistics segments which were affected by MCO (combined loss before tax of RM36mil), POS's FY20Q2 might have already turned profitable despite a net foreign exchange gain of RM9.4mil. It registered a net loss of RM19mil in FY20Q2.

If we combined mail, courier and international segments in the last 5 quarters, we can see that there is a significant jump in revenue and PBT in the most recent FY20Q2 ended in Jun20.

So, POS is expected to have higher parcel volume and at least partial recovery in it logistics and aviation segment in FY20Q3. Do you think that it can turn profitable on quarterly basis for the first time since Jun 2018?

Personally I can't be very sure but I think the possibility is rather high.

A huge impairment loss can come and sink the whole ship though.

POS CEO did mention to The Edge in Sep20 that with their 5-year transformation plan since 2019, their original plan is to break even by FY2021.

However, he said that it has been fast-forwarded by about a year owing to the increase in demand for SendParcel's service during the MCO period.

3. Divestment of non-core loss-making aviation business

POS used to be a cash rich and zero debt company back in 2016. It has RM639mil cash and revolving credit of RM99mil. It made profit every quarter at that time.

In 2016/2017, POS acquired KL Airport Services Sdn Bhd (KLAS) from its parent company DRB-Hicom. KLAS was renamed as POS Aviation.

Not sure whether it's coincidence or not, the profit and balance sheet of POS went downhill after this acquisition.

Referring to the revenue/operating profit bar chart above, even though POS Aviation segment contributed consistent operating profits to the group, it might be loss-making after depreciation and other charges. 

Now POS is working to divest this non-core business.

In Feb20, POS proposed to sell 49% stake in its wholly owned POS Aviation Engineering (PAE) to SIA Engineering for RM10.1mil. PAE registered loss after tax of RM1.67mil with RM25.7mil revenue in FY ended Mac19.

PAE provides aircraft maintenance and engineering services.

In Aug20, POS proposed to sell 51% stake in its wholly owned World Cargo Airline (WCA) to Asia Cargo Network for RM40mil. WCA registered loss after tax of RM32mil with RM83mil revenue in 9-month period ended Dec19.

WCA provides services for the movement of postal and courier products to Sabah & Sarawak. The disposal will result in an one-off gain of approximately RM63.0mil to POS.

Both proposed divestment are still in progress as of today. Since these 2 subsidiaries are loss-making, this move should be positive to POS.

While things do look good for POS at the moment, there are still some concerns.

• The revenue from traditional mail will continue to decline year after year
• One-off impairment especially from its Logistics and Aviation segment like the past 2 years
• Competitive environment in its courier segment might reduce its profit margin further
• Continuous dumping of shares by KWSP & KWAP

After going through POS cash flow, the one thing that stands out for me is its high non-cash items.

For its FY20Q2 (Jun20), it has a total depreciation of PPE & assets of RM60mil in a quarter, or RM240mil a year! Compared to previous quarters, it also has a relatively high impairment of receivables & PPE of RM20.7mil.

When there is so much depreciation charges, usually we expect its cash flow to be good and the company is usually cash rich.

However for POS, while it used to be a cash rich company, its cash keeps dropping and bank borrowing keeps increasing from year 2016.

Luckily, for the first time in so many years, its cash level starts to climb and at the same time, bank borrowing starts to drop since the start of year 2020.

Latest net debt to equity ratio stands at 0.18 which is not bad.

Nevertheless, POS is still planning to invest a lot in its courier business to improve its efficiency.

Its fully automated integrated fulfillment center in Senai Airport costing RM40mil will be ready in 2021. It is able to process 120,000 parcels a day.

Over the next 2 years, POS will be spending RM300mil to develop such fulfillment centers in northern region, east coast, Sabah & Sarawak, to compliment its current facilities at Shah Alam and KLIA.

Once all these facilities are ready, POS will be able to guarantee delivery within 24 hours to all locations within Peninsular Malaysia.

This is definitely a massive advantage compared to other competitors, which might give POS better sales and margin in the future if the competitors do not improve.

While the intention is good for the company and consumers, all these are expected to increase the depreciation charge, increase the debt and finance cost, and reduce the cash. 

Can the extra profit earned (if any) cover the extra cost? Hmm... you judge.

If POS can turn profitable, how much can it make in a year? Is it RM10mil, RM50mil or RM100mil? This is also not easy to predict.

So basically I can't have a target price for it now base on EPS and PE ratio.

If it can make a net profit of RM50mil a year, with total outstanding shares of 782mil, projected EPS will be 6.4sen. 

How much PE is fair to a company with significant courier business? 10x, 20x, 30x or higher? I just don't think it can be as high as GDex.

POS used to trade above RM5 in 2017, when it made annual net profit of RM82mil & RM93mil in FY17 & FY18 respectively. 

However, when POS acquired KLAS from DRBHicom in 2017 for RM835.16mil, it issued 250.8mil new shares at RM3.33 each, which was almost 47% of POS existing share capital at that time.

Even with such dilution in earning, current share price of around RM1 still looks relatively "cheap". It's also well below its net assets per share of RM1.77. 

This is not a comprehensive research on POS and there is no buy or sell call on the stocks mentioned. Invest at own risk!