Earnings disappointed against widening losses at its relatively new courier segment. Near term losses could be compounded with the acquisition of additional courier operations. While we like Century for its long term prospects, its immediate prospect is clouded by fierce competition and long gestation periods of new initiatives. We downgrade Century to a Hold from a Buy rating, with a lower TP or RM0.70.

Below Expectations

Century’s 2Q18 core net profit of RM1.9m (-48% yoy) extended 1H18 earnings to RM4.6 (-46% yoy). This was below our and consensus expectations, comprising 26% and 32% of full year estimates respectively. Start-up losses for the courier services segment (CS) since 1Q18 persisted. Earnings contracted considerably against the already thin margins.

Start-up Losses Outweigh Revenue Surge

Revenue surged 45% yoy to RM104.0m in 2Q18, primarily driven by its procurement logistics segment (PLS) (+211% yoy to RM39.3m) after seeing new customer addition. Meanwhile, its TLS segment saw reasonable revenue growth of 6% yoy to RM63.0m. CS segment grew revenue by RM0.5m to RM1.7m qoq in 2Q18 after its launch in 1Q18. While both the primary segments PLS and TLS saw mild operating contractions, insufficient economies of scale at the newly launched CS segment led to a 48% yoy plunge in PAT in 2Q18.

Mildly Positive Over Courier Services Acquisition

Century announced the acquisition of its substantial owners’ courier services operations. We are mildly positive over the exercise as it offers synergistic strategic value. However, we anticipate for it to further compound losses in the near term. In the quarter ahead, we expect the TLS segment to benefit from a burst in trade restocking in the lead up to the implementation of SST in Sep. However, we slash our 2018-20E earnings by 25%, accounting for a longer than expected gestation of the CS Segment and higher operational costs.

Downgrade to Hold With a Lower TP of RM0.70

We downgrade Century to a Hold rating (from Buy) over our concerns of its immediate prospects, with the TL and CS segments encountering fierce competition. Following our earnings adjustment, we derive a lower DCF-based TP of 0.70 (from RM1.20 previously), implying a 2019E P/E of 17.5x. Upside risk: (1) Faster than expected turnaround in the CS segment and (2) effective cost rationalisation initiatives. Downside risk: (1) CS segment losses widen and (2) escalating competition.

Source: Affin Hwang Research - 27 Aug 2018