CJ Century Logistics’ 1Q19 result was below expectations. 1Q19 core net loss of RM1.6m was mainly due to higher courier services (CS) losses and lower total logistics services (TLS) margin. We expect earnings to improve in 2H19 following the commencement of the new warehouse in July 2019. However, due to the weak performance in 1Q19, we cut our 2019-21E earnings by 16-31%. Maintain HOLD with lower DCF-based TP of RM0.38.

Below Expectations

CJ reported a core net loss of RM1.6m in 1Q19 compared to a core net profit of RM3m in 1Q18. This was mainly due to i) higher CS losses of RM3.9m (vs. RM1.5m in 1Q18 and RM1.8m in 4Q18 due to higher cost for business expansion); and ii) lower TLS margin, dragged down by certain low-margin operations such as the oil and gas division. Sequentially, its 1Q19 core net loss widened and was 1.5x higher compared to 4Q18’s core net loss of RM0.6m. In subsequent quarters, we expect a turnaround back to profitability as we expect lower CS losses and better TLS margin.

Strong Revenue Jump

Revenue jumped 37% yoy to RM127m in 1Q19 as revenue improved across all segments, mainly driven by its PLS segment (+88.6% yoy to RM58.2m). Meanwhile, its TLS segment improved by 4% yoy to RM63.2m and CS segment improved by 3.8x yoy to RM5.7m. However, the surge in operating costs (+43% yoy), depreciation costs (+43% yoy) and interest expense (+163% yoy), partly associated to CS business expansion, led to a loss before tax of RM1.1m in 1Q19.

New Warehouse Expected to Commence as Scheduled

The construction of the new warehouse is expected to complete by end-May 2019, and scheduled to start operation in July 2019. We expect the commencement of the new warehouse to support the group’s TLS and CS earnings in 2H19.

Maintain HOLD With Lower TP of RM0.38

We cut our 2019-21E earnings by 16-31%, accounting for higher CS losses and lower TLS margin of 4% (vs. 5% previously), given the competitive operating environment. We maintain our HOLD call with a lower DCF-based TP of RM0.38 following the earnings cut. Key risks to our call include slower/faster turnaround of CS segment and slowdown in global economic growth.

Source: Affin Hwang Research - 27 May 2019