· A smooth ride before dampener. Recall that we issued a Trading Buy call on CENTURY at RM0.875 with a Fair Value of RM1.19 back in mid-May 2015 as we then favoured the integrated logistics service provider for its: (i) explosive earnings growth potential, (ii) exciting expansion plan, and (iii) attractive dividend yield. Subsequently, the market warmed up the merits of the company which coincided with M&A speculations and its share price climbed 30% approaching our FV to as high as RM1.14 in early-August. However, the momentum was abruptly halted when CENTURY was slapped with a Letter of Demand (LOD) amounting to RM21.6m from Nestle for purported losses and damages which triggered a sell-down of its shares (refer overleaf for chronology of events).

· Not the end of the world. We were negatively surprised by the LOD (refer overleaf for details) as the demand was filed more than 18 months after the initial tie-up. The impact could be significant as the amount of RM21.6m represents >75% of our projected FY15 net profit. On the bright side, CENTURY does not have any ongoing contracts with Nestle, thus the risk of revenue loss is nil. We think the dispute might drag on for a long period of time of time. Assuming the worst case scenario where CENTURY was to pay the full demanded amount of RM21.6m, we think its expansion plan to build a multi-storey warehouse will still proceed but FY16E net gearing could increase to 0.53x from 0.46x as initially projected. As for the impact to earnings, the extra borrowings, if any arising from the payment could increase its interest expenses by as much as RM1.1m (3.4% of FY16E net profit) assuming an interest rate of 5% p.a.

· Decent growth despite setback. As of 9M15, CENTURY recorded core net profit of RM18.8m on the back of higher revenue amounting to RM224.5m (+7.2%). The result was below our expectation by matching only 59.5% of our initial projection as the logistics division was dragged down by general weakness in trade volume (Malaysia total trade volume: - 0.5% in the same period). However, on a positive note we are encouraged that the company has still managed to register a growth of 21.9% thanks to the encouraging performance in procurement logistics (+85.7%) owing to contribution from new customers despite the challenging business environment. On top of that, CENTURY has also paid total DPS of 4.5 sen in 9M15 as compared to 2.3 sen in 9M14 and we expect another 0.5 sen to be dished out for the rest of FY15.

· Cautious near-term outlook. CENTURY could be facing a more challenging time moving forward as we think the weak consumer sentiment might persist and the trade volume is also not expected to rebound strongly in the short-term. However, we opine that consumer sentiment might start to recover 6-9 months post-GST implementation while our team of economists foresee trade activity to pick up, based on the assumption that the US will lead growth among developed economies and eventually spur demand in other developed and emerging markets. To reflect the near-term weakness, we conservatively revised our projection downward by 9.8% and 6.6%, respectively in FY15E and FY16E.

· Maintain Trading Buy with lower Fair Value of RM1.01 (from RM1.19). Correspondingly with the earnings revision, our FV is trimmed down to RM1.01, based on unchanged 12.5x PER FY16E. Our FV offers total upside potential of 29.6% (including dividend yield) and thus, we maintain our Trading Buy rating. While there could be share overhang due to the LOD dispute before a resolution, we think that even an unfavourable outcome would not dent the fundamentals of the company and/or hurt its core net earnings too significantly. The industry-wide weakness in trading activity may slow its earnings growth, but we are still projecting double-digit earnings growth for the next two years with the assumption of recovery in trade volume and sentiment.

· Key risk: (i) Unfavourable outcome of LOD, (ii) Delay in new warehouse construction, and (iii) Failure in renewing oil logistics license.

Source: Kenanga Research - 26 Nov 2015