CJ Century posted a core net loss of RM9.8m in 2019, compared to our forecast loss of RM7.5m and market expectations of RM5.5m net profit. Though revenue improved 23% yoy, the group incurred losses due to higher courier services (CS) losses and lower total logistics profit (TLS). Depreciation and interest costs were also higher due to its expansion in the CS segment. Due to the challenging operating environment and low share liquidity, we cease coverage on CJ Century. Our lass call is SELL with a TP of RM0.35.

Higher-than-expected 2019 Core Net Loss

CJ posted a core net loss of RM9.8m in 2019 compared to a core net profit of RM6.4m in 2018. While revenue was up 23% yoy in 2019 on higher procurement logistics (PLS) (+60% yoy) and CS (+161% yoy) revenue, the group incurred a loss due to higher depreciation (+92% yoy) and interest expense (+50% yoy). This was mainly on the back the group’s expansion in the TLS and CS segment. The group incurred an operating loss of RM2m as margins were lower for the TLS and PLS segments, while the CS segment remained loss-making.

Operating Environment Remain Challenging

On a qoq basis, CJ’s core net loss widened by 60% to RM2.4m. Revenue fell 4% qoq due to lower TLS (-2% qoq) revenue, partly offset by higher PLS (+120% qoq) and CS (63% qoq) revenue. The Group’s profitability was affected by lower TLS operating profit (-49% qoq) and higher CS losses (+5% qoq). We believe the operating environment will remain challenging given fierce competition within the logistics industry, coupled with ongoing costs from its expansion in the CS segment. Its sorting facility in its new warehouse in Setia Alam is still running around 50-60% capacity. The group is in the midst of acquiring CJ Korea Express for a total purchase consideration of RM100m through a new shares issuance. While the success of the acquisition will contribute positively to the group’s earnings, we expect the group’s CS segment will take at least another 2 years to turnaround.

Cease Coverage

We cease coverage on CJ Century partly due to challenging operating environment and low share liquidity. Our last call for the stock is SELL with a 12- month DCF-based TP of RM0.35. Key upside risks include a faster turnaround of the CS segment, lower-than-expected competition and global economic recovery.

Source: Affin Hwang Research - 28 Feb 2020