We advocate investors to look into the logistics sector in Malaysia as we believe the sector is poised for re-rating based on the following factors; (i) huge potential growth from E-commerce in the local market, (ii) FMCGoriented customers mix, which provide resilience and recurring business as well as making the logistics players a relevant proxy of F&B industry, (iii) value asset play, with majority of logistics player sitting on valuable and strategic industrial land banks that can be revalued at higher price on top of (iv) sustainable growth in the sector driven by growing trend of logistics outsourcing, as well as the economies of scale as a result of expansion and consolidation. On a top-down approach, we are calling for TRADING BUY on TASCO with FV of RM5.41 which is backed by its Japanese owner Yusen Logistics and we also like its potential exposure into the E-commerce bandwagon and CENTURY with FV of RM1.19 on the back of its innovation in providing value-added services whilst also embarking on capacity expansion in order to capture the growing demand.

Elevating demand for logistics services. We gather that the demand for warehousing spaces is increasing with industrial land in Klang Valley prime areas getting more expensive (refer to charts below), which had induced more manufacturers and companies to explore for warehousing alternatives rather than incurring capex for land purchases. Going by such rationale, it also makes more efficiency sense for the manufacturers or companies to outsource the whole logistics operations to third-party logistics services providers which provide comprehensive services, including procurement, transportation, storage, assembly and repackaging, customs clearance, inventory management, container haulage, IT system and etc. We understand that a growing number of MNCs are receiving global mandate to outsource the logistics services. In addition to the costs savings and better specialized services, the trend of outsourcing also allows manufacturers or companies to focus on the core operation of their businesses.

Source: Kenanga Research - 18 May 2015