Results

• Below – 1QFY18 core net profit came in at RM6.9m, accounting for 10.5% of our HLIB forecast and 8.6% of streets’ estimates.

Deviations

• Due to weaker than expected logistics performance.

Dividend

• None.

Highlights

• YoY: Core net profit plunged 48.5% to RM6.9m due to (i) weaker logistics division attributable to startup costs of its cross border logistics; (ii) higher depreciation upon warehouse capacity expansion; and (iii) higher interest costs due to draw down in borrowings for expansion.
• QoQ: Earnings weakened by 59.6% mainly dragged by (i) weaker logistics performance upon increase in overheads post capacity expansion; and (ii) weaker property contribution due to completion of SIDC project in 4Q17.
• We expect the logistics division to experience subdued earnings in FY18 as the initial startup costs of cross border business and higher overhead costs post warehouse capacity expansion will take at least a year to translate into growth in the topline.
• Meanwhile, its property development division may see stronger contribution in coming quarters as the Pine Tree project is approaching completion.
• Its rumored REIT-ing of its warehousing asset plan appears to be delayed to 3QFY18 or later due to land title amalgamation being more complex than earlier expected.
• E-commerce still accounts for an insignificant part of its logistics business and we do not anticipate the group to participate in the DFTZ initiative launched by government in the medium term.

Risks

• Contract cancellation from major customers;
• Surge in fuel prices;
• Decline in domestic trade volume

Forecasts

• Cut FY18/19 forecast by 26.7/19.5% to account for weaker margins from the logistics division due to gestation period. Maintain FY20 forecast, as we remain confident that its earnings from logistics division to normalize in FY20.

Rating

HOLD ↓

• With its REIT listing plan of warehousing assets delayed, near term catalyst is not present for the stock while its medium term earnings outlook remains challenging.

Valuation

• Post earnings cut, SoP TP is lowered to RM1.87 from RM2.15. Downgrade to HOLD.

Source: Hong Leong Investment Bank Research - 29 Aug 2017