We returned from a management meeting further reiterating CENTURY as a longer-term e-commerce play, premised on its ventures in courier services, which could potentially break even by 2021 underpinned by support from CJ Logistics. That said, near-term earnings outlook is expected to stay flattish on elevated cost. Maintain OUTPERFORM call with lowered TP of RM0.90 post FY18-19E earnings cut of 2-11%.

Recap of 4Q17 results. Post-meeting, we further clarified that the poorer 4Q17 results with net profit plunging 44% YoY were mainly due to: (i) additional operating costs from setting-up of courier services business, (ii) unutilised warehouse capacity in Port of Tanjung Pelepas, due to competition, and (iii) lower utilisation in its oil logistics.

Venture into courier services. Its venture into the courier services business is progressing as planned. After obtaining its license mid-last year and commencing operations at the beginning of this year, CENTURY’s courier services is currently operating 86 trucks and 11 distribution centres, at full capacity of 7k parcels per day. Management intends to expand rapidly, and targets to reach 350 trucks and 25 distribution centres by end-2018. Beyond that, parcel capacity is expected to be given another major boost once its new multi-storey warehouse becomes operational in 2019. With that said, we expect the venture to be loss-making for the time being, reaching an eventual breakeven at 2021.

Positive synergies from CJ Logistics. After emerging as CENTURY’s largest shareholder, CJ Logistics is understood to continue its hands-on approach in providing CENTURY managerial and networking assistance. This is further evidenced by the company’s proposed name change to “CJ Century Logistics Holdings Berhad” announced on 15 March 2018, which we believe, allows CENTURY to further leverage on CJ Logistics’ established branding. Additionally, we believe CJ Logistics’ guidance to be crucial towards CENTURY’s venture into courier services, given the former’s status as the number one delivery company in Korea with 40% market share.

Maintain OUTPERFORM. We lowered our FY18-19E earnings by 2- 11%, after adjusting for a higher operating cost assumption as we opt to be conservative. Similarly, our DCF-derived TP is lowered to RM0.90 (from RM1.05 previously), after we updated our forward capex assumptions. Our DCF-valuation is based on these assumptions; (i) 5.8% discount rate, and (ii) 1% terminal growth. Note that we also expect CENTURY to be in low net-gearing levels of 0.1-0.2x moving forward (as compared to net-cash position currently) due to capex incurred for its multi-storey warehouse, most of which is expected to be recognised in FY18. Although expecting some earnings growth weakness in the current juncture, our OUTPERFORM call is premised on CENTURY being a longer-term e-commerce play, leveraging on its courier services venture. Among players venturing into the space, we favour CENTURY given: (i) its relatively healthy balance sheet, (ii) CJ Logistics’ expertise as a market leader, and (iii) CENTURY’s ability to leverage on existing customer base and branding. Our TP implies forward PERs of 24-25x, as compared to established courier players GDEX and POS trading at 97-89x and 36-30x forward PERs, respectively. Likewise, investors could also find comfort as the current share price is trading hugely discounted from CJ Logistics’ entry price of RM1.45/share. Risks to our call include: (i) over-optimism in courier service venture, and (ii) lower-than-expected growth in existing logistics business.

Source: Kenanga Research - 22 Mar 2018