GDEX recorded poorer results for 1Q18, both on a YoY and QoQ basis, due to higher operating expenses on the back of increased competition. Nevertheless, the results were deemed as broadly in-line with expectations, given 1Q being a seasonally weaker quarter. Moving forward, we believe GDEX will continue facing margin pressures as competition continues to intensify. With most of the private placement funds still intact, we believe further inorganic growth is still likely. After a +48% price rally since our initiation report, we believe that foreseeable positives have already been well priced-in at current levels. Maintain UNDERPERFORM with unchanged TP of RM0.45.

1Q18 results broadly within expectations. Coming in at 20% and 19% of our and consensus full-year FY18 earnings forecasts, respectively, we deem 1Q18 net profit of RM7.9m to be broadly within expectation on the back of a seasonally weaker 1Q (e.g. 1Q16 and 1Q17 contributed to 18% and 22% of their full-year earnings, respectively). No dividends were announced, as expected.

Overall poorer results. 1Q18 marked the second consecutive quarter of earnings decline on a YoY-basis, with quarterly net profit dipping 2.6% from RM8.1m in 1Q17. The poorer results were reflective of the increasing industry competition, leading to deteriorating margins, with net profit margin falling to 11.5% in 1Q18, from 14% in 1Q17. Operating expenses were higher by 21%, outpacing revenue growth of 18.5%, which were contributed mainly by its e-commerce volumes. Sequentially, net profit declined 31.4% QoQ from RM11.5m in 4Q17, also on the back of increased operating expenses by 16.5%. However, we believe this is a non-issue, given the seasonally stronger 4Q performance.

Intense competition continues to impact margins. While GDEX could be seen as an earnings beneficiary for e-commerce delivery due to its pure-play courier services business nature, entrance of new players coupled with competition with existing established players further intensifies competition within the industry. We believe GDEX is likely to continue facing margin pressures given the price elastic nature of the industry. However, GDEX is currently sitting on net-cash of RM316m, as most of the private placement proceeds are still intact. Thus, we believe further inorganic growth is still likely, with management currently still pro-actively seeking further strategic investment opportunities to enhance its longer-term competitiveness.

Maintain UNDERPERFORM. While maintaining our call, our DCFderived TP of RM0.45 is also retained, based on assumptions of 7.8% WACC and 5% TG. Simultaneously, our FY17E/FY18E earnings forecasts were also slightly adjusted by -2%/-3% post-housekeeping. Since our initiation report last December with an “OUTPERFORM” call, GDEX had already seen a share price rally of +48%. With that said, we believe foreseeable positives have already been well priced-in at current levels, with the share currently trading at 101x forward PER. As such, we reiterate our existing UNDERPERFORM call.

Risks to our call include: (i) exponential courier volume growth beyond our forecasts, and (ii) sooner-than-expected significant earnings materialisation from its potential acquisitions or inorganic growth.

Source: Kenanga Research - 21 Nov 2017