Despite the 45% yoy increase in 9M18 revenue, Century’s 9M18 core net profit fell 47% yoy to RM7.8m, accounting for 60% of the consensus and our previous FY18 forecast of RM13.1m. This was mainly attributable to higher costs for its total logistics services (TLS) segment and start-up losses from its courier services (CS) segment. With results below our estimates, we cut our FY18-20 EPS forecasts by 11-20% and lower our 12-month TP to RM0.53. Nonetheless, we maintain our HOLD call as we remain positive on its long-term prospects.

Core Net Profit Down 47% Yoy

Century’s 9M18 revenue increased by 45% yoy to RM313.1m on the back of higher revenue from its TLS segment (+6% yoy) and its procurement logistics services (PLS) segment (+294% yoy), coupled with additional revenue from the CS segment which started in 1Q18. However, its 9M18 core net profit decreased by 47% yoy to RM7.8m mainly due to higher costs from certain TLS contracts and ongoing costs as a result of the expansion of the CS operation. Earnings were below expectations, accounting for only 60% of the consensus and our previous FY18 estimate.

Better Qoq Earnings in 3Q18

Sequentially, 3Q18 core net profit increased by 70% qoq to RM3.2m on the back of a 12% qoq increase in revenue. The EBITDA margin improved by 0.6ppt qoq to 6.5% in 3Q18, as the PLS margin improved by 2.1ppts though this was partially offset by a lower TLS margin (-0.1ppt) given fierce competition in the segment and continued losses from the CS segment as it still lacked economies of scale.

Positive Long-term Prospects

We believe the group’s CS segment will continue to incur losses in FY19 and break even in FY20, given the ongoing merger and current lack of economies of scale. The construction of the 3-storey warehouse in Setia Alam, which is expected to be completed in 1H19, will increase its self-owned warehouse capacity by about 33%. With the additional capacity, complementary networks and expertise from the recent acquisition, we believe its profit margins will improve, resulting in better earnings growth in the long run.

Maintain HOLD with a lower TP of RM0.53

We cut our FY18-20 EPS forecasts by 11-20% given the lower-thanexpected earnings from the TLS and CS segments. We derive a lower DCFbased TP of RM0.53 (from RM0.70 previously), implying a 16.4x FY19E PER. We maintain our HOLD call as we still like its long-term prospects.

Key Risks

Upside risks: (1) Faster-than-expected turnaround in the CS segment, and (2) effective cost rationalisation initiatives. Downside risks: (1) CS segment losses widen, and (2) escalating competition.

Source: Affin Hwang Research - 15 Nov 2018