We believe CENTURY to be a promising e-commerce play over the longer-term through its upcoming ventures into parcel delivery. Among new players venturing into this space, we favour CENTURY given the backing from CJ Korea (its largest shareholder) to give it a competitive advantage, coupled with a healthy balance-sheet to provide longer-term scalability. Likewise, CJ Korea’s emergence as its largest shareholder should also provide positive synergy to its existing logistics operations. With seeds being sown for longer-term growth, we are initiating coverage on CENTURY with an OUTPERFORM call and TP of RM1.25.

Full-fledged logistics player. CENTURY is currently one of the largest logistics players in the country, specialising in integrated logistics, oil logistics, procurement logistics, supply chain solutions as well as datamanagement solutions. Currently, CENTURY manages a total of 2.2m sq ft of warehousing space, with a total of 606 vehicles in its trucking fleet. In Sep 2016, CJ Korea Express emerged as CENTURY’s largest shareholder after acquiring 120.5m shares or c.31.44% stake from founder Datuk Richard Phua and family, for a price of RM1.45/share.

Positive synergy from CJ Korea Express. We believe there is a strong positive synergistic value from CJ Korea as CENTURY’s largest shareholder. CJ Korea is currently the largest logistics provider, as well as the number-one parcel delivery company in Korea with a 40% market share. CENTURY is expected to benefit from utilising CJ Korea’s 76 global networks worldwide to expand its existing customer base and services, coupled with transfer of industrial expertise and technologies to achieve better operational efficiency.

Venture into courier services. Having already secured a courier service license, CENTURY is set to venture into last-mile delivery to ride on the longer-term growth of e-commerce. Among new players venturing into this space, we favour CENTURY the most, given; (i) CJ Korea’s backing as a market leader to provide CENTURY with a competitive advantage, (ii) its low net gearing, which should provide additional visibility towards longer-term scalability to eventually compete with established players (e.g. POS and GDEX), and (iii) CENTURY’s ability to leverage on its existing branding and networks nationwide. Timeline-wise, we expect CENTURY to commence its last-mile operations in early FY18, with earnings impact to be largely neutral during its initial few years of infancy.

Expansion plans. CENTURY had commenced construction on a new multi-storey warehouse situated in the Eastern Gateway Industrial Hub, Klang. This is expected to bring in an additional 450k sq ft of warehousing space (c.20% of existing capacity), and we expect construction to be completed by mid-FY18. The company has earmarked a total of RM150m capex for FY17-18, which includes; (i) RM95m for the construction of the new multi-storey warehouse and office, (ii) RM45m for purchase of up to 500 units of delivery trucks, (iii) RM5m on warehousing equipment, and (iv) RM5m for IT-related expenses.

OUTPERFORM, with DCF-derived TP of RM1.25, based on our assumption of; (i) 5.8% WACC, and (ii) terminal growth of 1%. We opted to use the DCF valuation approach as compared to a “straightPER” valuation as we believe the former better captures the longerterm growth prospect of CENTURY. Our valuation implies a PER of 27x on FY18E earnings, which we believe is peer comparable, as it is (i) discounted compared to established parcel delivery players, with GDEX and POS currently trading at forward PERs of 106x and 34x, respectively, given its start-up status into the industry, and (ii) below CJ Logistics Group’s forward PER of 40x, but (iii) at a premium against other integrated logistics peers at mid-teens PER, which we think is justifiable given CENTURY’s more promising future exposure towards e-commerce. Additionally, investors may also find some comfort with the current share price trading at below CJ Korea Express’s entry price of RM1.45/share. Risk to our call includes (i) over-optimism in courier service venture, and (ii) lower-than-expected growth in existing logistics business.

Source: Kenanga Research - 10 Oct 2017