FY17 results came in within our expectations after growing 7% YoY from higher revenue, underpinned by increased parcel delivery demand from e-commerce. Moving forward, we believe GDEX will continue facing margins pressures as competition intensifies. However, with most of the private placement funds still intact, further expansions, either organically or inorganically, are still highly possible. After a +59% rally since our initiation report, we believe that positives are already well priced-in at current levels. Maintain UNDERPERFORM with unchanged TP of RM0.48.

FY17 within our expectations. FY17 net profit of RM36.8m came in within our expectations at 96% of our full-year forecasts, but below consensus at 90%. We believe the discrepancy between our and consensus earnings forecasts were due to over-optimism by the market on GDEX’s e-commerce parcel delivery growth. The proposed first and final dividend of 0.25 sen is also in-line with expectations.

Full-year net profit grew 7% on higher revenue. FY17 revenue improved 14% to RM250.5m, from RM219.8m in FY16, mainly due to increase in demand of courier services from e-commerce. Following this, net profit improved 7% from RM34.4m last year, partially offset by higher operating expenses (+18% YoY, from RM184.6m to RM217.1m). As for the individual quarter of 4Q17, revenue grew 10% YoY to RM64.9m, from RM58.9m in 4Q16, due to similar aforementioned reasons of higher demand. However, net profit declined 12% YoY from RM13m to RM11.5m, on the back of higher operating expenses (+14% YoY, from RM46.5m to RM53.2m) due to network expansions.

QoQ seasonally much stronger. Sequentially, 4Q17 came in seasonally stronger, with net profit surging 44% QoQ, from RM8m in 3Q17. While revenue posted stronger figures (+6% QoQ from RM61.5m) due to higher volumes from festive seasons, the stronger earnings were mostly attributed to lower expenses recognised during the quarter, thus leading to more favourable operating margins of 23% from 16% in 3Q17.

Intense competition may impact margins. While GDEX is seen as an earnings beneficiary for e-commerce deliveries due to its pure-play courier services business nature, entrance of new players coupled with market share competition with existing established players further intensify the competitiveness of the industry. We believe GDEX is likely to continue facing margin pressures given the price elastic nature of the business. However, GDEX is currently sitting with net-cash of RM306m as most of the private placement funds are still intact. Thus, we do not discount the possibility of further expansions, either inorganically through acquisitions, or organically through additional sorting-hubs and distribution centres expansions.

Maintain UNDERPERFORM. We made no changes to our FY18E earnings forecasts, while introducing FY19E numbers. Likewise, we also retained our DCF-derived TP of RM0.48, based on assumptions of 7.8% WACC and 5% TG. After a +59% price rally since our initiation report on GDEX with an OUTPERFORM call, we believe foreseeable positives have been well priced-in at current levels, with the share currently trading at 92x forward PER. As such, we reiterate our current UNDERPERFORM call. Risk to our call includes (i) exponential volume growth beyond our forecasts, and (ii) sooner-than-expected earnings materialisation from potential inorganic growth.

Source: Kenanga Research - 30 Aug 2017