GDEX delivered a positive set of results, with 9M17 earnings growing +18% YoY, underpinned by a healthy parcel delivery demand from e-commerce. The company’s secondary sorting hub is set to commence operations in 1H FY18, while further inorganic growth remains likely as funds raised from the private placement are still largely intact. While earnings prospects continue to remain positive, we believe that current share prices have ran ahead of fundaments, with a YTD share price rally of +79%. As such, we are downgrading our call to UNDERPERFORM, with an unchanged TP of RM1.93.

Within expectations. Coming in at 66%/62% of ours/consensus FY17 full year forecasts, we deem GDEX’s 9M17 net profit of RM25.3m to be broadly within expectations, with anticipation of a seasonally stronger 4Q17. As a comparison, 9M15 and 9M16 made up 66% and 62% of their respective full-year earnings. No dividends were announced, as expected.

Stronger results YoY. 3Q17 net profit of RM8m came in 9.3% higher YoY compared to RM7.3m in 3Q16, positively attributed to higher revenue of RM61.5m, from RM53.9m (+14%), due to increase in parcel volumes from higher e-commerce transactions, while slightly offset by lower operating margins of 15.7% vs. 16.2%, and higher effective tax rate of 14.4% vs 12% previously. Cumulatively, 9M17 net profit improved 18.2% from RM21.4m in 9M16, in tandem with a higher revenue of +15.4% at RM185.6m from RM160.9m, coupled with higher interest income of RM8.9m, from RM3m previously.

Sequentially weaker. QoQ-wise, 3Q17’s net profit declined 12.9% from RM9.2m in 3Q16, in line with a revenue drop of 7.1% from RM66.1m, due to decline in e-commerce volumes post-festive season, coupled with a slight deterioration of operating margins, from 16.9% to 15.7%.

Growth plans to continue. GDEX is favoured to continue as a direct earnings-proxy to the last-mile delivery industry, given its pure-play parcel delivery business, riding on the growth of the local e-commerce scene. In overcoming capacity constrain issues, its secondary sorting hub in Sungai Buloh, Selangor, is set to commence operations by 1H FY18, with an average sorting capacity of c.60k parcels/day. We believe this would greatly ease congestions faced by its main sorting hub, which currently is able to support up to 130k parcels/day after recent upgrades and workflow restructuring. Furthermore, given that funds raised from the private placement are still largely intact, we do not discount GDEX to continue seeking inorganic growth regionally.

Downgrade to UNDERPERFORM. While earnings prospects remain largely positive, underpinned by the growing e-commerce in the region, we believe GDEX is currently trading beyond fundamentals after its +79% price rally YTD, with current forward PER of 123x at a huge premium compared to global comparable peers’ average of 40x. As such, we are downgrading our call to UNDERPERFORM with an unchanged DCF-derived TP of RM1.93 as we made no changes to FY17-18E earnings forecasts. Risk to our downgrade call includes (i) exponential volume growth beyond our forecasts, and (ii) sooner-than-expected earnings materialisation from inorganic growth.

Source: Kenanga Research - 24 May 2017