· Trading Buy with Fair Value of RM1.19. We are issuing a ‘Trading Buy’ call on CENTURY with FV of RM1.19 (potential upside: 37.6%), which is based on 12.5x FY16E PER, at a 35% discount from the overall average derived from global logistics companies as well as at a 50% discount from F&B companies under our coverage as we think that CENTURY has excellent exposure to the resilience nature of F&B sector but has better earnings growth comparatively. On top of that, we are projecting DPS of 5.5 sen and 5.0 sen, respectively, for FY15 and FY16, which translate into a yield of 6.4% and 5.8%. The payouts are based on c.50% of PAT (including exceptional items) as cash proceeds of one-off gain will also be distributed. To recap, the Group has made a net gain of RM9.2m or 2.5 sen/share after disposing a piece of industrial land in April 2015, which will lift its FY15E PAT to RM40.8m. We believe the pay-out is supported by the healthy balance sheet (at net cash position as of FY14) and strong cash flow.

· Innovative logistics player. Century is a leading provider of supply chain solutions in Malaysia. Further dissecting the business segments, integrated logistics is the bread and butter for the Group which contributed to 72% of FY14 revenue. Oil logistics provides ship-to-ship transfer for both fuel and crude oil in mid-sea and contributed 18% of FY14 revenue and 37% of the operating profit. The remaining 10% of revenue came from the procurement services, which assembles electronic and electrical appliances. Moving forward, the Group is also planning to introduce a new business in data management solutions (DMS) by leveraging on its existing client base. Century’s appeal lies in the followings:

1) It is expected to generate solid earnings growth averaging 19% per annum over the next two years.

2) Its ability to secure new contract underpinned by its track record with established clientele. 3) Decent dividend yield of 6.4% and 5.8%.

· Solid earnings growth over the next two years. We are projecting core net profit growth of 36.2% in FY15 and 9.8% growth in FY16, before the new capacity from expansion kicks in in FY17. We are assuming 160k sf of additional warehousing space in FY15 and another 240k sf in FY16 on a rental basis for the integrated logistics division, as the Group plans to use the rental space to lock in the customers designated for the new warehouse coming on-stream in FY17. We also expect the oil logistics division to drive the earnings moving forward on the back of higher calls made while we are conservatively projecting flattish growth for its procurement logistics division. As for the new business in DMS, we have yet to factor in any earnings contribution as it is in infancy stage.

· Resilience backed by favourable clientele mix. Currently, CENTURY manages 1.8m sf (1.4m sf owned) of warehousing space, as a parameter of its capacity for integrated logistics division. There are two warehousing facilities in Port Klang and another four in Pelabuhan Tanjung Pelepas (PTP), Johor. FMCG manufacturers (40% of division revenue) are major customers of the logistics division, followed by steel and E&E product manufacturers. Top 10 customers include local established names like F&N, Mondelez (formerly Kraft), Celcom, Press Metal, and Hartalega. We believe that the FMCG-oriented customer mix is favourable to CENTURY due to the resilient demand of food and beverage products.

· Expansion plan in place. In anticipation of rising demand, the Group is eyeing to expand the warehousing space by 450k to 600k sf through the planned multilevel warehouse to be built at the Eastern Gate Way Industrial Hub in Klang. The construction is expected to cost RM85m and scheduled to be completed by FY17. The expansion capex is expected to lift the net gearing, but we estimate the ratio to stay below 0.4x (from net cash position currently). Nonetheless, we are positive on the expansion plan as it highlights the optimism and confidence of the management on the growth of its logistics business.

· Key risk: (i) Single customer concentration, (ii) Delay in new warehouse construction, iii.) Failure in renewing oil logistics licensing. 

Source: Kenanga Research - 18 May 2015