We came away from GDEX?s briefing feeling positive about the company?s expansion plans. Further upgrading works of its main sorting hub is expected to increase sorting capacity by end-FY17, while a secondary hub and another 4 regional hubs are also in the pipeline, totalling to 5 hubs coming to operations within the next 1-2 years. Regional expansion continues to be the company?s long-term goal. On the downside, margins stagnation resulting from intense competition and bleak earnings outlook from its logistics warehouses was also highlighted, leading to a 4% cut in FY17-18E earnings. Maintain OUTPERFORM with lowered TP of RM1.93.

Overcoming capacity bottlenecks. Following some restructuring works done throughout 2H last year in its main sorting hub in Petaling Jaya, average sorting capacity currently stands at 85k parcels/day (up from 78k parcels/day in FY16). The company had occasionally pushed its handled volume to as high as 110k-120k parcels/day during peak periods, although this had led to some cases of delivery delays. Fleet size has also increased to 768 from 654 as at end-FY16, with management guiding that it hopes to reach 1,000 in 1-2 years in tandem with the expected volume increase.

Expansion pipeline. Following that, the company guided that it is in the midst of further upgrading the sorting hub, which includes an already-installed new chute system together with some operational restructuring. This would allow it to reach an average sorting capacity of 150k parcels/day by end-FY17. GDEX is also in line to setting up a secondary sorting hub in Sungai Buloh, and another in Sarawak to serve the east-Malaysian market. In the past month, the company also commenced operations on its smaller-scaled northern and southern hubs mainly to serve the smaller regional markets. This brings GDEX?s total hub-count to 5 in the coming 1-2 years, with our estimation on capex to be around RM15-20m. No guidance on earnings impact was given yet, as the premises are still in its designing and gazetting phase.

Regional expansion as long-term goal. Recall that last year, GDEX subscribed to a 5-year convertible bond for 40% equity stake in Indonesian parcel delivery company PT Satria Antara Prima (PT SAP) for RM10m, marking the company?s maiden effort towards expanding regionally, with the management indicating strong confidence in their investment, baring the intention of most likely converting it to equity stake. Following that, the company is also on the lookout in screening high-potential investments with good management for further inorganic growth. With most of its funds from the YAMATO private placement still intact (raised net-cash of RM209m, with only RM15.5m spent for investments in PT SAP and Web Bytes); we maintain our view that further acquisition-investments are still very likely.

Competitive last-mile industry. The company also highlighted risks of the intensively competitive parcel delivery industry. With the competition aggressively pricing-down, we expect GDEX to face margins stagnation in attempts to retain market share. It currently still has the second largest market share in the parcel delivery space in the country, with POS being the first. Meanwhile, we also gathered that losses sustained from its logistics segment for 1H17 of RM0.76m were mainly due to a loss of a major client. As such, we expect the segment to record full-year losses.

Maintain OUTPERFORM. We trimmed our FY16-17E earnings by 4% after accounting for losses from its logistics segment. As such, our DCF-derived TP was lowered to RM1.93, from RM1.97 previously, with the assumption of (i) 7.8% WACC, and (ii) 5% terminal growth. We believe earnings outlook to continue to remain steady at double-digit growth, with the margins-stagnation to be overcome by volume growth post-expansions.

Risks to our call include (i) lower-than-assumed volume growth, and (ii) de-rating in price multipliers valuations.

Source: Kenanga Research - 24 Feb 2017