· Flying on parent’s wings. The holding company of TASCO, Yusen Logistics is listed in Japan with market capitalization of USD515m and operates one of the largest networks for global distribution services covering Europe, East Asia, South Asia & Oceania, Japan and the America regions. Hence, TASCO has the unique advantage of leveraging on the global network of Yusen Logistics, and with its chairman, Mr. Lee Check Poh, recently being appointed as Yusen Logistics’ regional executive officer overseeing the South Asia & Oceania region effective April 2015, we expect more regional activities going forward.

· E-commerce provides exciting prospect. The group has seen strong growth in its warehousing business fuelled by surge in demand of warehousing space from major online retailers like Zalora, Lazada & etc. We believe online retailing in Asia offers huge growth potential given that the forecasted online shopping penetration in Asia Pacific is expected to grow to 50.9% in 2018 from 44.1% in 2014. Currently, TASCO is only reaping part of the benefit from online retailing business from warehousing income, but we believe the Group can move a step further by offering value-added services, particularly courier services. We understand that the Group is looking into acquiring local private courier services player in order to tap into the fast-growing online retail market.

· Expansion plan lined up. The company intends to add another 0.7-1.0m sf storage capacity by phases via refurbishing its existing warehouse in Shah Alam. Multiple-level warehouses will be built in order to multiply its revenue/sf by maximising the value of the existing land it is sitting on. Currently, the Group is waiting for the green light from authorities to proceed with its plan of building a 4- storey warehouse which will elevate the capacity by 1.0m sf or 45% to 3.2m sf from 2.2m sf currently. However, if the Group fails to get the highest plot ratio, it will settle for 0.7m sf of extra space with a 3-storey warehouse.

· Manageable debt level. CAPEX commitment for the expansion is expected to cost RM120.0m-RM150.0m and will be carried out in two phases, with the first one poised to be completed in 9 months upon commencement of works. The outcome of the approval application from authorities is expected to be known in the next 1 or 2 months. Assuming 80.0% debt funding, its net gearing will only increase to 0.33x assuming full amount drawdown of loan financing. As the expansion will be in phases, we reckon the debt drawdown will be on a gradual basis and the group’s net gearing could be maintained at below 0.1x.

· 3-year NP CAGR of 22.6% projected. Our base case assumption suggests that CNP is expected to grow at CAGR of 22.6% for the period FY13-FY17 mainly driven by: (i) conservative 12.0%-13.0% growth in FY15-FY17 in contract logistics and trucking division, which is typically driven by warehousing capacity (2-storey PTP warehousing measuring 200,000 sf and in FY16 and potentially another 200,000 sf from the Phase 1 expansion of its Shah Alam warehouse in FY17), (ii) margin improvement of total logistics division from 14.0% in FY14 to average of 14.8% in FY15-FY17 driven by economies of scale, and (iii) 3% topline growth assumed for sea and air freight division. In a bullish case scenario where growth in contract logistics division hits 20.0% per annum possibly due to higher volume from its clients, CNP could grow at CAGR of 25.0% in the similar time period.

· Trading Buy. We have a Trading Buy recommendation on the stock with TP of RM5.41 (upside: 31.3%) pegged to CY16 forward PER of 12.5x. Our valuation is justified given that it is valued at 20% discount to holding company, Yusen Logistics and 35% discount to the international average derived from our universe of global logistics companies. The valuation is also in line with the FBM Small Cap average, but we believe the exciting earnings growth and relatively lower risk level are the attractions, differentiating TASCO from other small cap stocks. Further re-rating may arise in the event of an M&A exercise involving courier services player which will enable them to tap into the fast-growing internet retailing segment directly.

Source: Kenanga Research - 18 May 2015