Results

• Tasco Berhad (Tasco) reported a PATAMI of RM1.3m in 1QFY20, which tumbled 74.5% yoy and 74.0% qoq. Meanwhile, revenue was flat, -0.9% yoy and +0.3% qoq.

• Result is substantially below expectations. 1QFY20 PATAMI is below ours and consensus expectations by only meeting 5-6% of full year earnings estimates. The higher than-expected operating expenses and financing costs dragged down the Group’s overall performance. The was reflected by the poor showing of the Cold Supply Chain segment (CSC) which is fall under the Domestic Business Solutions (DBS).

Comments

• CSC and Trucking divisions weighed on earnings. Tasco recorded weaker yoy and qoq results mainly due to lackluster results from the CSC (segmental PBT: -58.1% yoy and -66.7% qoq) and Trucking division (segmental LBT of RM1.6m vs PBT of 0.7m in 1QFY19 and widening its losses from LBT of RM0.7m in 4QFY19). The lower profit from the CSC was attributable to loss-making convenience retail business which was transferred from warehousing business pursuant to internal reorganisation. Meanwhile, the higher fixed operating expenses and highly competitive operating environment caused the Trucking division to bleed. Furthermore, the Group was also bogged down by higher financing costs, which soared 44.1% yoy and qoq to RM4.9m in this quarter.
• Targeting SME customers and strengthening its existing CSC business. Moving forward, Tasco will focus on catering to a third segment within its portfolio, namely the SME segment (apart from the large accounts within the Group’s DBS and International Business Solutions (IBS) segments). A new sales group is being organised to focus on SMEs which currently comprise 98.5% of the total business community in Malaysia and contributing more than one-third of Malaysia’s economic growth. Also, Tasco will continue to strengthen its CSC by expanding into new territories such as in East Malaysia as the Group has a clear competitive advantage over other logistics players who are typically focusing on more traditional logistics operations.
• Halal logistics support the way forward for regional expansion. Tasco is also keen to explore sea, land and air opportunities on the Halal CSC given our current position as the largest Halal warehouse operator and cold-chain logistics player in Malaysia. Moreover, Tasco has a very strategic location in West Port that can cater to both ambient and cold chain Halal activities. In fact, the Group is currently in negotiations with customers to develop additional facilities for them. With preparations for the 2020 Tokyo Olympics underway, there is ample opportunity for both Tasco and its parent company, Yusen to provide halal logistics support. The Group is working with governments, ports and other parties to explore best options in supporting local suppliers for the 2020 Olympics game and showcase their halal products to the world while reinforcing Malaysia’s reputation as an international halal hub.
• Downside risks to the stock include: a) Rising operational costs (particularly labour costs and impact from Sales and Service Tax); b) Higher financing costs stemming from the recent acquisitions; c) Intense competition for cargo in the traditional core logistics businesses; d) Hiccup in performance due to loss of major customers; and e) Slowdown in domestic and overseas economies as well as international trade pursuant to the lingering US-China trade war.

Earnings Outlook

• We slash our earnings forecasts for FY20F-FY21F by 45-46% to RM14.2m and RM14.45m respectively after lowering our revenue and margins assumptions for IBS and DBS (particularly CSC and Trucking) as well as imputing higher financing costs. The prospects of the Group are closely tied to the performance of the global and domestic economies, as the logistics industry is dependent on economic activity and international trade.

Valuation/Recommendation

• Maintain HOLD call for Tasco with a lower target price of RM1.10 (RM1.46 previously) which is pegged at 15.5x FY20F PE following our earnings cut. Our neutral stance on the stock is premised on the Group’s uninspiring earnings outlook coupled with prevailing global economic and international trade headwinds.

Source: JF Apex Securities Research - 23 Aug 2019