If you haven't read part 1, its HERE.
Services
Next, lets talk about DRBH’s services sector amounted to 36% of DRBH’s total revenue. DRBH’s subsidiaries under Services include HICOM University College (100%), Pos Malaysia (53.5%), Puspakom Sdn Bhd (100%), and Bank Mualamat Malaysia (70%).
With POSMALAYSIA taking up the most significant margin (50%) in services sector, it became a key factor affecting DRBH’s bottom line. As technology like e-signature, QR codes and e-receipt replaces the necessity of mailing, mail volumes have been on a downward trajectory since 2015. As of 2018, more than 80% of Malaysia total populations are exposed to internet connection and the numbers are only set to grown bigger in the future.
In POS’s financial year ended 31st March 2019, it reported its massive loss of RM166 million, the first loss reported since 2008. Revenue decreased by 9% to RM594 million from RM653 million y-o-y, while operating expenses grow by 6.1%.
From the Figure below its clearly seen that revenue for its service sector decreased RM68.7 million y-o-y (2019-2018).
With POS Malaysia’s revenue at RM1.122 million as of 6 month cumulative 3Q19, it takes up around 50% of total DRBH’s services sales. POS’s net profit loss increased by RM44 million to -RM50 million from -RM6 million last year. Profit/Loss before zakat is taken to ignore the effect of taxation to observe the impact of POS in DRBH’s service sector. In 2018, Profit from services factor was RM154 million, and POS Malaysia’s loss was -RM6 million. In 2019, profit from services factor dropped to RM95 million, and POS Malaysia’s loss at the same cumulative quarter was -RM50 million.
Segment report from DRB's Interm Report (March'19)
It’s shown from the interim reports that Services sector was the second largest contributor (25%) to DRBH in Sept19. Gross margin stands at around 4.5 – 6.5% for the sector. Before Automotive sector turn black, Services sector was the largest income contributor in the overall DRBH’s bottom line. Will POS MALAYSIA be better in the upcoming quarters?
POS MALAYSIA has SIX segments which are Postal Services, International, Aviation, Courier, Logistics and Other business that contribute to its total revenue.
From Figure below, it’s shown that Postal Services is the biggest loss-making segment since 2017 and the loss only continues to become bigger as revenue in mail volume fall and operating expenses balloons. International segment which includes direct entry and transhipment fall into red starting 2018 which could be blamed to weaker RM/USD, higher expenses and challenging global operating environment. Aviation suffered the same fate as its peers as its revenue continue to fall throughout the years and it saw its first loss at Jun'19 and continue to lose more at Sept'19.
Logistics segment is the only segment that has positive growth in profit quarter-to-quarter and is expected to continue its momentum to lead in the local logistics market amidst tight cost competition. Courier also did not escape its fate from falling profitability due to tight local competition from many emerging companies like GDEX, Lazada and more.
Besides, DRBH also owns 70% of stakes in Bank Mualamat, the Islamic banking organizations while Khazanah owns the rest. It is combined from Bank Bumiputra Malaysia, Bank of Commerce (M) Berhad and BBMB Kewangan. They provide Islamic financial products such as loans and fixed-deposit (Syariah form) and also islamic capital market product such as Islamic equity instrument, Islamic notes and paper. As these are not taking significant portion in DRBH’s revenue, I do not have much data to present but their Net Interest Margin (Nim) will ALSO be affected by the overnight policy (OPR) rate cut by Bank Negara Malaysia as both islamic and non-islamic banks work based on the same monetary policy. As for PUSPAKOM, although it is possible that its concession will be discontinued, the contract will extend until at least 2024, and it is expected to contribute positively in DRBHICOM’s earning.
As an overall, Logistics sector is the ONLY segment in POS MALAYSIA that is growing since 2018. In 13th Feb 2020, POS MALAYSIA announced that it is selling 49% of its stake in Pos Aviation Engineering to SIA Engineering for a cash consideration of RM10.09 million. I personally take this as a neutral news as it is only a one-off gain and affects neither the balance sheet nor cash flow of DRBH. With the postage hike coming in, it is only expected to improve the margin in the Postal Services segment slightly, which you can see from the Figure above has a long way to go before it actually turn black. Ordinary postal system, or snail mail has been a long-gone dying industry and will never be relevant again as internet development such as NFCP and 5G will improve the convenience of communication among people. It is mainly only for use in office and governments documents. Hence, I do not see any recovery or come back in POS Malaysia and its better for POS to be nationalized. Pain short better than pain long, I mean..u know what I mean.
RED for Services Sector.
Property
DRBH’s subsidiaries under property segment includes HICOM Berhad which owns Glenmarie Properties, EON Properties, Northern Gateway Infrastructure, Glenmarie Development, and much more. I am not going to list every single of them as it is inefficient to do that so I am just going to give an overview in terms of property. Property from a broader persective has been oversupplied since 2018 and it’s also shown in DRBH’s annual report comparison in their property sector as Figure below shown.
Figure: Total sales for each segment for financial year 12 months ended March’19.
Figure: Total sales for each segment for financial year 6 months ended Sept’19.
Cumulative from March 2018 to September 2019, DRBH’s total sales in properties has dropped for 33% in 2018 Fiscal year and 23% in cumulative 2nd quarter of 2019. As a conclusion, prospects in properties in 2020 remain gloom and DRB will continue to absorb negative impact from an oversupplied real estate market.
Final Comment
As an overall, at current P/E of 15.4 for DRBHICOM @RM2.30, its valuation is fair for me as POS Malaysia, banking, property is expected to suffer in a downward trajectory. Not to mention DRBHICOM’s huge finance cost and taxations always cut its earning by half. It only has a Current Ratio of 0.54 and a Debt-to-Equity (d2E) Ratio of 2.54. Big debt with high taxation and finance cost. Its only silver lining is the automotive sector which report higher vehicles sales from Sept to Dec19. I do not recommend or advise any buying or selling but I personally will not buy the stocks as I am uncomfortable with its huge finance cost, weak business sentiment, high d2E ratio and a low ROE.
Figure: Huge finance costs and taxations cost for every quarter of DRBH’s report.
Thanks for reading.
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