Highlights/ Comments

• We came away from the briefing feeling neutral.

• The group’s weak 1Q18 financial results were dragged by initial start-up costs for its newly established cross border business and several new warehouses with no revenue stream in the quarter. The group managed to secure new contracts for Huawei and Schneider with warehouse spaces were already rented in 1Q 18. However, revenue has not been recognized as the clients were still in preparation stage. We expect significant ramp up in 3Q18 as the two clients ramp up their utilization of the rented warehouse.

• For its cross border routes connecting ASEAN countries to China, it is still at pilot stage at this juncture with only 2-3 trips/day. Therefore, the contribution is still minimal. We believe gestation period of this project to be 1 year or more before it starts to contribute meaningfully as the business gains momentum. Nevertheless, it is still an untested proposition whereby its costs and time needed for delivery of goods are at the midpoint between sea freight and air freight. E-commerce clients now generally place more emphasis on timing of delivery over costs.

• Its e-commerce related business Instant (launched in May 2017) only has minimal contribution to the group despite recording significant growth with utilization now at 8000 packages sorted per month. At this juncture, the scale is considered small compared to other major courier players and we believe it will take years for the group to grow.

• Its current major client is Amway and the group is also in talks with local online market place Aladdin to move its halal cold chain products.

• For its property development business, significant bump up in earnings can be expected as PineTree project will be completed in 2HFY18 with RM100.3m worth of unbilled sales. That aside, its Batu Pahat commercial development project experienced slow sales with 28.9% take up recorded while 88.1% construction work was completed. We do not foresee significant replenishment of new projects for the next 1 year due to subdued property market.

• Overall, we believe FY18 to be a year of consolidation by the group as it faces initial start-up costs from its warehousing expansion plans and venture into the cross border routes. Therefore, we believe near term earnings headwinds are still present.

Risks

• Overexpansion of warehousing space;

• Surge in fuel pricing.

Forecasts

• Unchanged.

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 bleak.

Valuation

• Our SoP-driven TP is reduced to RM1.60 from RM1.87 as we ascribe a 20% discount on our hypothetical REIT warehousing fair value upon confirmation of further delay in the listing of its warehousing assets to FY19.

Source: Hong Leong Investment Bank Research - 7 Sept 2017