What’s new

• Tasco Bhd (TASCO) announced that its wholly-owned unit, Tasco Yusen Gold Cold Sdn Bhd (TYGC) had entered into a share subscription agreement with Japan Overseas Infrastructure Investment Corporation (JOIN) for the proposed issuance and allotment of 58,878,000 new ordinary shares in TYGC to JOIN for a cash subscription price of RM125m.

• In order to facilitate the proposal, TYGC plans to enlarge its current ordinary share of 2m in TYGC to 196.26m, in which 30% of the enlarged ordinary shares will be taken by JOIN, with remaining 70% (137.382m shares) owns by TASCO. At the same time, TASCO will put in RM69.26m as capital.

• Japan Overseas Infrastructure Investment Corporation (JOIN) – JOIN is a government-private sponsored fund in Japan that specializes in overseas infrastructure investment. Its role is to support and facilitate Japanese corporations to participate in the global infrastructure market. It is 87.19% owned by the Minister of Finance, Japan with the remaining shareholders consisting of various Japanese corporations.

• Tasco Yusen Gold Cold Sdn Bhd (TYGC) – It was incorporated in Malaysia on 27 May 2003 and adopted its current name since 17 July 2017. TYGC, through its wholly owned subsidiaries, namely GCT, GCIL and GCL provides fully integrated cold chain and convenience retail logistics services encompassing cold storage warehousing, temperature controlled trucking, convenience retail distribution services, freight forwarding and customs clearance.

• Gold Cold Transport Sdn Bhd (GCT) and Gold Cold Logistics Sdn Bhd (GCL) were acquired by TYGC on 12 July 2017 with a price tag of RM185.6m from Chang family.

• Gold Cold Integrated Logistics Sdn Bhd (GCIL) – It was formerly known as MILS Cold Chain Logistics Sdn Bhd and it was acquired by TYGC on 1 June 2018 with a price consideration of RM29.9m.

Comments

• Selling price of RM125m is at a premium of 45.3% as compared to the costs (acquisition price and deployed capital) incurred for TYGC. To recap, TYGC acquired GCT, GCL and GCIL for a price of RM215.52m, including the initial paid-up capital of RM2m and the fresh capital put in of RM69.26m. Cost of TYGC on paper was RM286.78m, translating into RM1.46 per share with its enlarged ordinary share of 196.26m. Meanwhile, JOIN is buying 58,878,000 new ordinary shares in TYGC for a cash subscription price of RM125m (equivalent of c. RM2.12 per share). As such, the buying price for JOIN is at a premium of 45.3% as compare to the cost.
• RM97m of the proceeds is earmarked for repayment of bank borrowings with another RM26.5m allocated for working capital purposes. We learnt that TASCO would utilize the proceeds to pay down the bank borrowings, which stood at RM375.2m in 3QFY19 (ended 31 December 2018). Based on an average interest cost of 4.7% per annum, the payment of bank borrowings results in interest savings of approximately RM4.56m per annum. Meanwhile, net gearing is expected to reduce to 0.75x from 0.83x, solely accounting for the repayment effect.
• Looking forward, TASCO’s earnings from TYGC would scale down to 70% from 100%. Based on 9MFY19 record, TYGC’s PAT was RMM7.259m. As such, TASCO’s future earnings would see a cut of c.RM2.9m (based on annualized 9MFY19’ PAT of RM9.68m). The impact is expected to kick in 2QFY20, in view of assumption that the proposal will be completed by mid-2019.

• Overall, we are positive with the proposal as net improvement in bottom line of c.RM0.56m/annum for mid-term and a possible synergy from JOIN. Net effect of the interest savings after accounting for tax effect would be RM3.47m, netting off the drop in earnings from TYGC of RM2.9m. The net improvement for bottom line would be +RM0.57m, based on the preliminary calculation. However, the impact might diminish along with the growth of TYGC in future. Nevertheless, the proposal will allow TASCO to establish a partnership with Japanese Government in the cold chain and convenience retail logistics segment, which could potentially provide TASCO with a greater access to other markets where JOIN has a presence.

• Approvals required – The proposed investment from JOIN is subject to the approvals from the shareholder of TASCO at an EGM to be convened at a later stage.

Earnings Outlook

• We keep our earnings forecast for FY19 and FY20 unchanged pending shareholders’ approvals.

• Downside risks: 1.) Rising operational costs (in particular 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 HOLD call for Tasco with a higher target price of RM1.46 (previously was RM1.28) as we ascribe higher PER. Our valuation is now pegged at 11.3x FY20F EPS. The PER ascribed for the group is at its historical 5-year mean PE in view of its better balance sheet position with lower gearing and lesser interest expenses commitment.

Source: JF Apex Securities Research - 1 Apr 2019