CJ Century Logistics’ 9M19 results were within our expectation, but below consensus. Though revenue improved by 21% yoy, the group incurred losses of RM5.9m. This was mainly due to higher courier services (CS) losses and a lower total logistics (TLS) profit. Depreciation and interest costs were higher due to its expansion in the CS segment. We expect losses to continue in 4Q given the longer gestation period and challenging operating environment. We maintain our SELL call with an unchanged DCF-based TP of RM0.35.

Losses Continue

CJ reported a core net loss of RM5.9m in 9M19 compared to a core net profit of RM9.9m in 9M18. Revenue improved by 21% yoy in 9M19 due to higher procurement logistics segment (PLS) revenue (51% yoy) and CS revenue (>100% yoy) that were partially offset by lower TLS revenue (-3% yoy). However, the group incurred losses in 9M19 mainly due to higher operating costs (25% yoy) and ongoing costs from the group’s expansion in the CS segment. Depreciation costs were up 87% yoy, while interest expense increased by 134% yoy. As a result, the EBITDA margin was lower by 3.1ppts to 4% in 9M19.

Core Net Loss Narrowed by 66% Qoq

On a qoq basis, CJ’s core net loss narrowed by 66% to RM1m. Revenue was down 15% qoq due to lower TLS (-8% qoq) and PLS (-26% qoq) revenue that were partially offset by higher CS revenue (+23% qoq). That said, losses narrowed in 3Q19 due to better operating margins from the TLS (+3.5ppts) and PLS segments (0.9ppts), and lower loss margin for the CS segment (-9.9 ppts). We expect losses to continue in 4Q as the operating environment remains challenging from high cost pressure and ongoing costs from its expansion in the CS segment. We gather that its new warehouse in Setia Alam has commenced operation and is currently running at a sorting capacity of 25,000 parcels/day (vs. current sorting capacity of 50,000 parcels/day). New sorting lines are expected to be installed within the next 2 years to expand the sorting capacity by 200,000 parcels/day.

Maintain SELL

We make no changes to our earnings forecasts for 2019-2021, and maintain our SELL call with an unchanged DCF-based TP of RM0.35. We believe the group’s prospects remain challenging given the longer gestation period, fierce competition within the logistics sector and expected global economic slowdown. Key upside risks to our call include a faster turnaround of the CS segment and global economic recovery.

Source: Affin Hwang Research - 22 Nov 2019