3Q17 results bounced back from last quarter’s poor performance, but were slightly lower on a YoY basis. Nonetheless, we deem it broadly within our expectation while anticipating a stronger 4Q17. Moving forward, we maintain our view on CENTURY as a longer term ecommerce play, premised on its upcoming ventures in parcel delivery, which is expected to commence operations in 1Q18. On-going synergistic exercises with CJ Korea are also expected to benefit its current logistics business moving forward. Maintain OUTPERFORM with unchanged TP of RM1.25.

Broadly within our expectations. We deem 9M17 core net profit (CNP) of RM11.7m to be broadly within our expectation, coming in at 67% of our FY17 full-year earnings forecast, in anticipation of a stronger 4Q17 premised on expected logistics volume recovery coupled with lower tax expenses. However, we believe the results came in below market’s expectations, making up only 55% of consensus full-year earnings forecast, possibly due to the over-optimistic market expectation towards its logistics volume growth. No dividends were declared, as expected.

Sequential recovery, but slightly lower from last year. 3Q17 CNP of RM3.9m was slightly lower YoY from RM4.0m in 3Q16, in tandem with a 1% drop in revenue due to lower activities from its Procurement Logistics Services. On a sequential basis, 3Q17 CNP recovered 28% from a poor 2Q17 (recall that 2Q17 CNP declined 44%/38% YoY/QoQ) on lower operating expenses and finance costs, resulting in much more favourable PBT margin of 7.5% as compared to 6.5% last quarter. Cumulatively YTD, 9M17 CNP was 15.6% lower from 9M16 CNP of RM13.9m, heavily attributed to the aforementioned poor 2Q17 results, coupled with the slight drop seen in this quarter, as previously mentioned.

Longer term e-commerce play. We maintain our view on CENTURY being a promising e-commerce play over the longer term, premised on its upcoming ventures into parcel delivery, which is expected to commence operations by 1Q18. Among new players venturing into the space, we favour CENTURY given: (i) CJ Korea’s backing as a market leader, (ii) its healthy balance sheet at current net-cash position, which should provide additional visibility towards longer-term scalability to eventually compete with established players, and (iii) CENTURY’s ability to leverage on existing branding and networks nationwide. Likewise, CENTURY is likely to benefit from on-going synergistic processes with CJ Korea, allowing it to tap into its extensive networks and infrastructure to further improve its existing logistics business.

Maintain OUTPERFORM. With no changes made to our FY17-18E earnings forecasts, we are also maintaining our DCF-derived TP of RM1.25, based on the assumptions of; (i) 5.8% WACC, and (ii) 1% terminal growth. Moving forward, we do not discount a possible valuation rerating, pegged against established parcel delivery players (e.g. POS and GDEX) once its venture into the space successfully matures from the gestation phase to become earnings accretive. Likewise, investors entering at current levels may find some comfort with the current share price trading below CJ Korea’s entry price of RM1.45/share.

Risk to our call include: (i) over-optimism in courier service venture, and (ii) lower-than-expected growth in existing logistics business.

Source: Kenanga Research - 20 Nov 2017