Results

• Tasco Bhd (TASCO) reported a net profit of RM2.8m in 2QFY19 which tumbled 46% qoq and 69.7% yoy with revenue growth of +5.2% qoq, -0.5% yoy.

• Weaker QoQ performance was a result of margin erosion in both International Business Solutions (IBS) and Domestic Business Solutions (DBS).

• Meanwhile, unfavourable YoY performance was bogged down by Ocean Freight Forwarding (OFF) division and Contract Logistics Division (CL).

• Below expectations. 6MFY19’s net profit below ours and consensus expectation by matching 20.8% and 24.3% of full year earnings estimates respectively. The lacklustre performance was mainly due to a loss in OFF division and occurrence of pre-operating expenses for newly secured consumer retailing business under CL Division, coupled with additional costs from support segment as a result of loan facility and acquisition of land and warehouses at Pulah Indah.

Comments

• OFF remained the culprit by dragging down IBS performance. Revenue of IBS down 0.9% qoq and 20.4% yoy. On the same note, PBT was down by 6% qoq and 66.1% yoy. Cumulatively for 1HFY19, IBS’s revenue and PBT declined 17.9% yoy and 61.7% yoy respectively to RM119.8m and RM3.2m. The unappealing results was mainly due to a loss before tax of RM0.9m in OFF as compared to a PBT of RM6m in 6MFY18. However, the adverse effect was partly mitigated by better performance in Air Freight Forwarding (AFF) division, which saw a PBT growth of 71.9% yoy to RM4.2m.

• DBS QoQ and YoY performance fazed by margin compression despite higher revenue recorded. Revenue improved 8.2% qoq and 12.2% yoy, underpinned by growth in Cold Supply Chain (CSC) division. However, DBS’s PBT slid 30.1% qoq and 35.2% yoy. It was mainly due to pre-operating expenses for newly secured consumer retailing business under CL Division. CL division’s PBT was down by 29.6% qoq and 61.1% yoy.
• 1HFY19 DBS performance was buoyed by CSC division and Trucking division (TD) despite CL division hit by pre-operating expenses. DBS 6MFY19’s revenue up 24.5% yoy to RM252.9m, thanks to growths in CL and CSC division. However, CL division’s PBT decreased 46.1% yoy in view of pre-operating expenses incurred for newly secured consumer retailing business. As such DBS 6MFY19’s PBT decreased 4.3% to RM15.2m.
• Support segment expenses piled up and weighed on the group performance. Apart from the operating business segments, PBT was further deteriorated no thanks to additional costs from Support segment. It was largely due to increased finance costs of RM5.9 million on loan and stamp duty of RM0.6 million on loan facility of funding for CSC business and the recent acquisition of land and warehouses at Pulau Indah (Westports Logistics Centre).
• Risk of slowing down for domestic and overseas economy. In the latest World Economic Outlook report released in October 2018, the International Monetary Fund downgraded its global growth projections for both 2018 and 2019 to 3.7 percent, which is 0.2 pts lower than its projections in April. Meanwhile, for Malaysia, the government has revised down its growth forecast for 2018 and 2019 to 4.8% and 4.9% respectively in its latest release of 2019 Economic Outlook report.

Earnings Outlook

• We slash our earnings forecasts for FY19 and FY20 by 36-48% to account for higher finance cost and potential slowdown in domestic and overseas GDP growth.

• Downside risks: 1.) Rising operational costs (particularly the labour costs and impact from new Sales and Service Tax) 2.) Higher interest costs 3.) Intense competition for cargo in our traditional core businesses. 4.) Hiccup in performance due to loss of major customers, and 5.) Slowdown in domestic and overseas economy.

Valuation/Recommendation

• Maintain BUY call on Tasco with a lower target price of RM1.35 (previously was RM1.96) after our earnings cut. We roll over our valuation to peg at 9.5x FY20F EPS. We believe value emerges following recent retreat in its share price. We lower our target PE valuation in view of low liquidity of the stock and softening growth. Nevertheless, ascribed PER is at its historical average trailing PE.

• We are favourable on its long-term future growth following its venture into cold chain market. With this, TASCO is able to generate synergies across all of its divisions and provide integrated logistics services for its clients. Furthermore, the trading business (by YLTC Sdn Bhd, a 60:40 JV between Yee Lee Corporation Bhd and Tasco Bhd) will create further synergy to its existing businesses such as Cold Chain and Contract Logistics.

Source: JF Apex Securities Research - 16 Nov 2018