What’s New

• Pleasant outlook on earnings and business prospects. We have met the management of Tasco Berhad (Tasco) and came back feeling positive on its prospects. We opine that the Group will resume its growth trajectory after 2 years of lacklustre net earnings as affected by the higher depreciation and financing costs pursuant to gestation period of business expansions into Cold Chain Logistics (CCL) and Convenience Retail Logistics (CRL). In fact, Tasco’s share price has surged 79% since its 1QFY21 results release in end of August. We reckon that the strong rally of share price is justified and sustainable in view of few catalysts being brewing on the Group’s outlook. Also, we feel that our initial earnings forecasts and consensus have significantly underestimated Tasco’s FY21-22F bottom line. Hence, we upgrade our call to BUY from HOLD with a higher target price of RM2.06.
   
• Granted ITA for carrying out Integrated Logistics Services (ILS) activities. In addition, Tasco has received an approval letter from Malaysian Industrial Development Authority (MIDA) for the second round of tax incentive to carry out ILS activities. The incentive will allow the Group to enjoy income tax exemption via ITA of 60% on qualifying capex incurred within 5 years. The ITA can be offset against 70% of statutory income for each year of assessment. The Group is required to commit investment in capex of at least RM240m for a period of 5 years.

Comments

• Benefitting substantially from ITA. We understand that Tasco could enjoy c.RM70m tax savings for six to seven financial years or equivalent to c.RM10m/p.a. and it can even be backdated to this financial year FY21 with its capex spending given two years consideration period of the incentive scheme. We also gather that Tasco’s capex funding could be 50% bank borrowings and 50% cash, and primarily on warehouse and truck. Thus, we are not overly concerned with the rising financing costs, particularly during prevailing low interest rate atmosphere. Furthermore, Tasco enjoys a sturdy balance sheet with its current net gearing of 0.35x.

• Catalysts of the stock. Tasco’s business expansions and strategies for the past 2-3 years have eventually yielded positive results. We are sanguine on the Group’s outlook as mainly driven by: 1) stronger performance in CCL under its Domestic Business Solution (DBS) on the back of securing more new customers, potential vaccine storage for Covid-19 (the Group is still in preliminary talks with the government agencies and current utilisation rates of its cold chain warehouses stand at C.85%) coupled with CRL is close to breakeven with better economies of scale; 2) hikes in ocean and air freight rates which could benefit its International Business Solution (IBS) as a result of favourable demand supply factors, i.e. surprisingly robust demand especially on E&E products during the pandemic, as well as supply disruption due to short of vessels, blank sailing and plane grounded; 3) reduction in non-operating and general expenses from Support division, largely attributable to reduced finance costs and drastic cost rationalisation initiated by the management since the Movement Control Order (MCO); 4) lower effective tax rate in relation to ITA entitlement; and 5) venturing into a niche and defensive food retail business segment by transforming itself into a major F&B trading house locally which focuses on distribution of food supply chain apart from being a comprehensive logistic player over the medium to long term.
   
• Earnings may deliver an upside surprise. To recap, the Group posted a resilient 1QFY21 result with its net profit of RM2.6m, which doubled yoy and staged a strong turnaround from a net loss in the immediate preceding quarter amid the MCO period. We are of the view that Tasco’s earnings for the coming quarters could be much stronger, partly lifted by the backlog orders and pent-up demand after relaxation of the MCO. Going forward, we are quite convinced of its earnings sustainability even after the pandemic on the back of the abovementioned catalysts. We now expect the Group to deliver commendable FY21F net profit of RM31.7m, soaring 255.6% yoy before stabilizing to RM35.0m net profit for FY22F, +10.6% yoy.
   
• Tap into food retail logistic business which is defensive in nature. We learnt that Tasco is aggressively tapping into the food retail logistic business via its CRL (which is in turn under its CCL division) and is ambitiously aiming to become one of the major F&B trading houses in Malaysia. This can be easily done by leveraging on its experience in existing JV trading business with Yee Lee. The management targets for established clients within four categories in petrol kiosk, convenience store, local supermarket and international merchant trade to provide one-stop or integrated logistic and trading service solutions to them. We understand that the Group is expanding its market share by exploring new tenders on the convenience retail front with several players. We reckon that it is a strategic business move as this segment is relatively unaffected by the economic fluctuations with dealings in essential and necessity goods (as evidenced by uninterrupted business during the MCO).

• Geographic expansions for its CRL and CCL. Tasco has plans to further expand its CRL footprint into the southern region of Peninsular Malaysia by early 2021. Also, the Group is looking into the northern region which will complete its food retail logistics storage and state-of-the-art sorting operations and accord its ability to serve all of Peninsular Malaysia. On CCL, Tasco aims to extend its business presence in East Malaysia.

Earnings Outlook

• We raise our FY21F and FY22F net earnings forecasts substantially to RM31.7m and RM35.0m from previous estimates of RM15.5m and RM16.0m respectively after lifting our revenue and margins on both IBS and DBS business divisions. Our net earnings forecasts have yet to factor in the ITA which would render lower effective tax rates to the Group in the coming years.

Valuation/Recommendation

• Upgrade to BUY from HOLD on Tasco with a higher target price of RM2.06 (RM0.93 previously) following our earnings upgrade. Our target price is pegged at 13x FY21F PE. We favour the Group for its commanding position in local logistic industry which offers integrated services as well as its niche expertise in F&B logistic under its CCL and CRL.

Source: JF Apex Securities Research - 14 Sept 2020