Can Pos Malaysia deliver the goods?

haven’t sent a letter through the post in years. My preferred choice of communication is the phone and SMS.
But I receive a lot of “snail mail” — bills, magazines, circulars and other such like. Conclusion: Business mail is good business for Pos Malaysia & Services Holdings Bhd.
Analysts have come to the same conclusion.
An analyst with a large foreign research outfit likens the stage which Pos Malaysia is at currently to the United States Postal Service (USPS) in the 1980s.
Pos Malaysia’s main business at the moment is mail usage and agency services, such as the collection of bills.
“The stage of growth of the postal services is usually reflective of the stage of economic growth of the country.
“The USPS grew around 5.0 per cent per year in the 1980s, fell to around 1.0 to 2.0 per cent in the 1990s and went negative in the new century,” he says, setting things in perspective.
In the event then, he expects Pos Malaysia to grow between 4.0 and 8.0 per cent over the next five years.
This is based on historical data, which showed that Pos Malaysia posted a compounded annual growth rate (CAGR) of around 4.0 per cent when gross domestic product was growing at a CAGR of 2.8 to 3.0 per cent.
All things remaining equal, the main question then is how to extract value from the company.
Fixed costs take a big chunk from Pos Malaysia’s income — 60 to 70 per cent going towards the salaries of its staff of over 14,000 currently.
Analysts don’t expect staff numbers to come down anytime soon. But they do expect Pos Malaysia’s management to push those numbers towards greater productivity and hence, margins.
At the same time, they also expect margins from the greater economies of scale that would be a result of the greater volume.
Analysts believe that this is Pos Malaysia’s plan over the next five years or so. Chairman Datuk Annuar Ma’aruf is reported to have said that the company will be aiming to “enhance delivery standards, increase productivity, retain customer loyalty, implement e-commerce-related ventures and extensive IT use, rationalise business and position itself for globalisation and e-business delivery”.
But analysts say that the postal company should appeal to the type of investors now who like companies with low business risk, a strong balance sheet and good cash flow.
Ticking off the positives one by one, the analyst with the foreign research house says, “Firstly, Pos Malaysia has a steady business of a monopolistic nature.
“Secondly, it has around RM220 million in the kitty from the sale of its former Phileo assets.”
He also estimates that Pos Malaysia generates around RM80 million in actual cash per year before investments and dividend payouts. “It is a cash business after all,” he points out.
“Thirdly, it has annual cash flow of between RM650 million and RM700 million that can be managed to produce higher yields.”
Though a large proportion — 55 to 60 per cent — are agency collections (fees that will be paid on to the phone and power companies, for instance), an analyst reckons that Pos Malaysia will be looking towards managing the funds to generate better yields than currently.
Going forward, he estimates Pos Malaysia will post a net profit of RM60 million this year and RM70 million next year. This translates to a fully diluted price-earnings ratio of around nine times this year and eight times next year.
Pos Malaysia recorded a net profit of RM11.5 million last year. However, analysts note that this only includes a four-month contribution from postal services although it had completed its takeover of the cash-rich shell of PhileoAllied Bhd on revised terms in August last year.
The Minister of Finance Inc had sold Pos Malaysia to PhileoAllied for RM800 million, satisfied by RM550 million cash and a convertible loan of RM250 million.

Different environment now
Some industry observers reckon that Pos Malaysia stands a good chance of developing into a model privatised entity.
“Tenaga, Telekom and Malaysia Airlines, for instance, were sobering and learning experiences. There also seems to be a change in business environment and political aspirations that could allow Pos Malaysia a fair shot at turning around a privatised company,” notes an industry observer.
But how?
Firstly, the plain old postal company has a nationwide network unmatched by any other distributor in the country.
“This is a jewel that can be leveraged on to direct sell any number of products, from computers to insurance,” notes an analyst.
Its first experience, the Employees Provident Fund Computer Purchase Withdrawal Scheme, which was conducted together with Odasaja Sdn Bhd, was nixed by the government after allegations that the money was withdrawn for other purposes. Still, it’s the first step on the learning curve.
Analysts note that some other listed postal entities had managed to turn around the “government” legacy into corporate profit. For instance, the Dutch Postal Services has ventured into the courier and express business by acquiring TNT Express.
There is also another, more immediate, way to boost its bottom line and that is the pricing structure for mail delivery. Analysts reckon that Pos Malaysia could “selectively review and readjust its pricing structure in its favour, while balancing its social responsibilities at the same time”. Commercial mail delivery is one area that could be looked at, they say.
“The perception of the postal industry is not a good one,” says the analyst baldly, “but with good management, things can change.”