The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
Maintain SELL with target price (TP) of RM3.36
Highlights/ Comments
- More insights on 2Q17 results. 2Q17 is seasonally the weakest quarter in the year with QoQ drop seen in volume of both mail (included in Postal Services division) and courier businesses. In the quarter, losses for Postal Services widened significantly due to weaker mail volume attributed to lower mail transactions. For courier, EBIT soared QoQ despite slight decline in topline due to better product mix as sales are driven by higher margin credit card deliveries caused by switching of bank cards to the pin system.
- More on KLAS. The KLAS acquisition was completed in end Sept 2016 with balance sheet already incorporated in 2Q17 but no P&L contribution yet due to minimal earnings contribution. KLAS, on a standalone basis, would be profitable after removing its related party loan (from DRB-Hicom) post deal completion but would be offset partially by losses from KLB subsidiary, due to struggling haulage and RORO services. Contribution is expected from 3Q17 onwards.
- Expansion of the courier services business. POS has expansion plans in cards for the courier business as they are eyeing to build an Integrated Processing hub in Section 21, Shah Alam (c.RM70-90m), which could potentially more than double the group’s parcel sorting capacity to 300,000 parcels/day. In addition, the group is also switching Pos Mail’s man power to Pos Laju to cater for higher growth in parcels in phases to avoid disruption to the traditional mail business. This is a safe and prudent way for maximizing efficiency for the group’s work force in our opinion.
- Old LCCT repurpose plan. The group is still at the planning stage on leasing the old LCCT terminal to be repurposed for its air cargo businesses. Lease rental is expected to be at RM19-20m/p.a. but the group would be given grace period of 6-9mths to account for downtime during renovation, pushing the first payment date to Oct 2017 at the earliest if everything goes according to plan.
- Huge contract for KLB. KLB has secured RM1bn worth of contracts comprising of Pengerang related (over 3 years) and TNB coal transporting contract (over 10 years). It has already started contributing to KLB in 3Q17 and it has an estimated PBT margin of 10%, which would help to offset losses registered under the KLB subsidiary.
- Outlook: While the group’s long term expansion plans to bring the company to the next level with more capacity to cater for growth, we are concerned about the near term earnings outlook with retail business in the red while international transshipment business remains erratic.
Risks
- Inability to raise postal tariff;
- New services/products fail to mitigate declining mail volume
Forecasts
- Maintained.
Rating
Sell ↔
- While we are still positive on its long term prospects for e- commerce driven courier business, recent share price surge has in our opinion, priced in the positives and we opine that earnings delivery could be a concern due to execution risk.
Valuation
- Maintain SELL at RM3.36 based on unchanged 20x FY18 PER.
Source: Hong Leong Investment Bank Research - 06 December 2016
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