Description
POS Malaysia is a small-cap Malaysian postal company, which trades for around the value of its net cash and securities. There is little currency risk as the Malaysian currency is pegged to the US dollar.
What is the core business?
The postal business is a monopoly granted by the government until 2035. The company also has an express delivery/courier service, but must compete in that business with FedEx, DHL, and the like. The company is similar to any other postal system in that it sets stamp prices and collects and delivers mail to homes and businesses. The company is profitable and growing. The most relevant comp is Singapore-listed Singapore Post, and there are also some others in Europe. Singapore Post trades for 14x (untaxed) earnings, and a similar multiple to EBIT.
What are the non-core assets?
For a price of M$2.38 per share, you get M$1.09 per share in net cash (12/04e), M$.74 of publicly traded TGB shares, M$.43 of unlisted debt securities at book value, and M$.03 of real estate. All this adds to M$2.29.
According to the company, the debt securities, though unlisted, are securities issued by government-linked organizations and are thus money good.
TGB is an aircraft leasing company, whose main customers are freight forwarders and cargo delivery companies. Its clients include DHL and Kerry Logistics. Given the growth in regional trade, one shouldn’t be surprised to learn that the shares seem at least fully priced (TGB MK on Bloomberg). Recently, the company swapped its minority holding in a TGB subsidiary along with some cash, for shares in the publicly traded parent company. So far it seems to have been a good deal.
Why does the company trade for net cash?
The most important reason seems to be the lack of confidence in management to be wise with the cash: Management consists mostly of ex-bureaucrats. The second reason is the discomfort of having the Malaysian government, which owns 30% and has board control, at the helm of this business. So far, though, in their three years of business, they have not done anything stupid. On the contrary they have run the business quite well, improving profitability, cash flow, and returns, and have engaged in some value enhancing moves, such as the share swap of their stake in a TGB subsidiary for shares in the publicly traded parent company.
Management has stated its intention to acquire courier businesses. The market seems worried that they will overpay, but all indications are that they are prudent and have reasonable return expectations for their investments. In any case, the price provides a sizable margin of safety.
What is it worth?
Assuming EBIT in 2004 of M$70mn and a 10x multiple, plus the M$1.025bn of adjusted net cash, fair value is M$1.72bn. There is roughly 450mn diluted shares outstanding bringing per share value to M$3.85 per share. The current price represents a 40% discount to fair value, with, I believe, very little downside risk.
Link to the annual report:
http://announcements.bursamalaysia.com/linkwebmainpage.nsf/lca.htm
Catalyst
As the company deploys cash in a non-harmful manner, the market should begin to become more realistic in its assessment of value here. It doesn't take much to build confidence, and there is plenty of margin of safety in case they do disappoint.