We returned from GDEX’s briefing with a more cautious outlook over likely margins pressures amid increasing competition, coupled with an expected increase in effective tax rates following the expiration of existing MIDA tax incentives. As such, FY18-19E earnings forecasts are trimmed by 13-19%. Meanwhile, plans for its secondary sorting hub have been called-off, as GDEX opts to focus on continued expansions on its main hub. With most of the private placement funds still intact, we believe future inorganic growth to still be likely. After a +56% price rally since our initiation on GDEX, we believe that foreseeable positives are well priced-in at current levels. Maintain UNDERPERFORM with lower TP of RM0.45.

Intense competition to impact margins. We were highlighted to the increasing competitiveness of the industry following the entrance of new players coupled with continued market share competition among existing established players. Going forward, we believe GDEX is likely to continue facing margins pressures, given the price-elastic nature of the business, as well as GDEX’s continued efforts in retaining and increasing market share. Additionally, GDEX’s MIDA tax incentives are expiring by end of this month. With no further developments regarding an extension, we expect forward effective tax rate to increase accordingly.

Relooking of expansion plans. Following continued restructuring efforts, GDEX’s average sorting capacity has increased to c.90k parcels/day from c.78k parcels/day last year. However, if necessary, the company is able to push its handled volume to reach a maximum capacity of 120-130k parcels/day, although this may lead to some cases of delayed deliveries. Fleet size has also increased accordingly to 831 from 654 last year. Meanwhile, we gathered that the plan for its secondary sorting-hub in Sungai Buloh has been called-off. Instead, GDEX is opting to focus on further upgrading its existing main sortinghub in Petaling Jaya, Selangor, with installation of a new sorting line currently in the pipelines to ease existing sorting constrains.

Inorganic growth still likely. Apart from its earlier investments into PT SAP Express and WebBytes Sdn Bhd amounting to RM16m, we believe that future acquisitions are still likely. GDEX is currently sitting at a net-cash position of RM306m, as most of its YAMATO private placement funds are still intact. We believe this war chest enables GDEX to be ever-ready should an investment opportunity presents itself.

Maintain UNDERPERFORM. Post-briefing, we tweaked our FY18-19E earnings forecasts downwards by 13-19%, to account for: (i) higher effective tax rates, and (ii) margins pressures for its express delivery business. Following that, our DCF-derived TP is lowered to RM0.45, from RM0.48 previously. The share has already performed remarkably well after a +56% price rally since our initiation with an OUTPERFORM call. While we still like GDEX for being well-managed, and a direct earnings beneficiary of the growing e-commerce, we believe foreseeable positives are already well priced-in at current levels with the share currently trading at 104x forward PER. Risks to our call include: (i) exponential volume growth beyond our forecasts, and (ii) sooner-than-expected earnings materialisation from potential inorganic growth.

Source: Kenanga Research - 8 Sept 2017