1H18 results came in below expectations from higher taxes, which we suspect could be due to possible provisions made against its prior tax incentives. Following that, we trimmed FY17-19E earnings by 6-8%. Continued expansions are still deemed likely, but persistent margins pressure from increasing competitiveness is also expected. Reiterate UNDERPERFORM call, with an unchanged TP of RM0.45, as current valuations seem rich.

1H18 below expectations. 1H18 core net profit (CNP) of RM14.5m came in at 37% of both our and consensus FY18 forecasts. Despite being the seasonally weaker half of the year, we deem this to be below expectations on the back of higher-than-expected tax expenses. That said, the results are fairly in line at the PBT-level at 43% of our, and market’s forecasts. No dividends were declared, as expected.

Results dragged by higher taxes. 1H18 CNP dropped by 16% YoY mainly due to the aforementioned higher tax expense, with effective tax rate jumping to 31% from 16% in 1H17. PBT improved by 4% YoY, led by revenue growth of 17% YoY from higher demand of courier services arising from e-commerce. For the individual quarter of 2Q18, CNP of RM6.6m is 28%/17% lower YoY/QoQ, similarly due to the higher taxes (2Q18 effective tax rate came in at 45%, versus 15% in both 1Q18 and 2Q17). That said, PBT came in 11%/29% higher YoY/QoQ, driven by higher demand from ecommerce. Note that 2Q is a seasonally stronger quarter than 1Q.

Possible tax provisions. We suspect the higher tax expenses in the current quarterly results could be due to some provisions made against possible losses from its prior tax incentives. Nonetheless, we trimmed our FY18-19E earnings by 6-8% following the results disappointment to account for higher tax assumption.

Continued expansions to be expected. We believe continued business expansions to be likely given its rich net-cash position of RM316m as most of its private placement funds still remain intact. However, GDEX is also expected to face increased competition from an increasingly saturated industry, which would continue to exert margin pressures.

Maintain UNDERPERFORM, with unchanged DCF-derived TP of RM0.45, based on assumptions of 7.88% discounting rate and 5% TG. While we like the company for its good management and expansion story, we believe our current UNDERPERFORM call to be compelling as valuations are seemingly overplayed at 106x PER, with earnings growth outlook also appearing increasingly uncertain. 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 - 23 Feb 2018