CJ Century Logistics’ 1H19 results were below expectations. The company posted a higher core net loss of RM3m (+87% qoq) in 2Q19 mainly due to higher courier services (CS) losses and lower total logistics services (TLS) profit. Depreciation and interest costs are higher due to its ongoing business expansion. We expect losses to continue in 2H19 given the longer gestation period and challenging operating environment. We downgrade our call to SELL from Hold with a lower DCF-based TP of RM0.35.

Below Expectations

CJ’s 1H19 revenue jumped 34% yoy to RM263.8m as revenue improved across all segments – Procurement Logistics Services (PLS) (+75% yoy), TLS (+4% yoy) and CS (>100% yoy). However, the group incurred a core net loss of RM4.7m in 1H19. This was mainly due to: i) higher CS operating losses of RM8.1m (+162% yoy); and 2) lower TLS operating profit due to lower profit margins for certain operations, particularly the oil logistics services division. The results were below expectations. The variance is mainly due to the weaker-than-expected TLS earnings and higher operating costs.

Sequentially, Core Net Loss Widened by 87% Qoq

Though 2Q19 revenue improved by 8% qoq to RM137m, its core net loss increased 87% qoq to RM3m. This was mainly due to higher depreciation (+48% qoq) and higher interest cost (+93% yoy) from its expansion in the TLS and CS segments. We expect losses to continue in 2H19 as the operating environment remains challenging. Its warehouse utilization in Port Tanjung Pelepas remains low at 70%, while the commencement of its new warehouse in Setia Alam is delayed to September 2019. Its CS segment is expected to remain in the red given fierce competition within the courier sector and lack of economies of scale.

Downgrade to SELL

We now expect a loss of RM7.6m in 2019E, while we cut our 2020-21E earnings by 33-80% to account for higher CS losses and a lower TLS profit margin. We downgrade our rating to SELL from Hold with a lower DCF-based target price (TP) of RM0.35 from RM0.38. We believe the longer gestation period, fierce competition within the logistics sector and expected global economic slowdown may weigh down the group’s earnings. Key upside risks to our call include faster turnaround of the CS segment and global economic recovery.

Source: Affin Hwang Research - 23 Aug 2019