We returned from a recent briefing by GDEX feeling largely neutral, with our outlook on margins pressures due to increasing competition remaining unchanged. Gradual operational expansions are still on-going, with further inorganic growth still likely given its strong net-cash position. After a +40% rally since our initiation report, we believe foreseeable positives are already well priced-in. Reiterate UNDERPERFORM call and TP of RM0.45.

Gradual expansions continue. Following on-going efforts in gradual operational expansions, GDEX’s current average sorting capacity has increased to 100k parcels/day, as compared to 96k parcels/day as at end-FY17, with fleet size also expanding to 905 vehicles, from 831 vehicles as at end-FY17. While business-to-business (B2B) deliveries still remain the more significant contributor towards its core delivery operations, business-to-consumer (B2C) deliveries are expected to be the main growth driver for GDEX moving forward. Additionally, we were also guided that GDEX could be in a longer-term pursuit to tap into the consumer-to-consumer (C2C) delivery market in efforts to increase its exposure towards the growing e-commerce market.

Intense competition to impact margins. With the increasing competition in the industry following the entrance of new players, coupled with continued market share competition among existing established players, we believe GDEX is likely to continue facing margins pressures given the price-elasticity nature of the business. In fact, we have already started to see early signs of such impacts from its most recent 1QFY18 quarterly results. To recap, core net profits saw a 2% deterioration YoY, despite a healthy revenue growth of 19%, reflective of margins pressures as a result of the increasing competition.

Further regional acquisitions still likely. Management has continued to display bullishness towards its business acquisitions that it has done thus far to-date, which include: (i) 30% stake in tech-company Web Bytes Sdn Bhd for RM5.5m, (ii) convertible bonds of 40% equity stake in Indonesian parcel delivery firm PT Satria Antara Prima for RM10m, and (iii) full acquisition of property investment company Abric Properties Sdn Bhd for RM19.3m. While these investments are only expected to turn earnings accretive in the longer term, we believe further inorganic growth from GDEX is still likely, especially regionally, with management currently pro-actively seeking further strategic investment opportunities. Additionally, the group is currently sitting on net cash of RM316m, with most of its private placement proceeds still intact.

Maintain UNDERPERFORM, with unchanged DCF-derived TP of RM0.45, based on assumptions of 7.8% WACC and 5% TG. Since our initiation report last December with an “OUTPERFORM” call, the share had already seen a rally of +40%. And while we still like GDEX for being well-managed coupled with its unique position as a pure-play parcel delivery company, we believe foreseeable positives have already been well priced-in at these levels, with the share currently trading at 96x forward PER. As such, we are compelled to 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 accretion from inorganic acquisitions.

Source: Kenanga Research - 7 Dec 2017