Last week, we visited CENTURY’s HQ located in Port Klang, and the construction site for its upcoming multi-storey warehouse. We returned maintaining our long-term positive stance on CENTURY, premised on its courier services ventures, while also acknowledging flattish earnings in the short-to-medium term due to increased costs from expansions. No changes were made to FY17-18E numbers. Maintain OUTPERFORM and unchanged TP of RM0.90.

Courier services on track. Visiting its parcel sorting operations in its HQ, we are comforted that its courier services operations are going on track. CENTURY is currently operating 10 other similar distribution centres across the West Coast of Peninsular Malaysia, serviced by 86 delivery trucks. All-in, the company sorts around 7-8k parcels/day, with CJ Logistics playing a crucial role in securing delivery volumes from key customers. From here, management intends to expand rapidly, and targets to reach 350 trucks and 25 distribution centres by end-2018, with expected capex at around RM33m.

Healthy utilisations in its Klang Valley warehouses. From our site visit, we gathered that CENTURY’s warehouses around the Klang Valley area are mostly operating on near-full capacity. In its HQ, we witnessed its warehouses fully packed with consumer electronics, as well as F&B goods. We believe concerns over under-utilisation are mostly present only in Port of Tanjung Pelepas area, where CENTURY owns 5 warehousing facilities. This is due to an influx of new warehousing spaces in that area, resulting in increased competition.

Upcoming multi-storey warehouse to serve as new HQ. Located at the Eastern Gateway Industrial Hub in Klang, current construction progress for its upcoming multi-storey warehouse stands at around 20%, with expected commencement in 2019. Total capex is expected to be around RM120m, with the bulk of it to be recognised in FY18. Postcompletion, the multi-storey warehouse will serve as the company’s new HQ, bringing an additional 450k sq ft of warehousing capacity to the current 2.2m sq ft that the company current manages.

We believe the upcoming facility is crucial for the eventual success of its courier services venture, as a large portion of the ground floor will be gazetted as the company’s main sorting hub for its courier service operations, which should bring its sorting capacity to well over 100k parcels/day (from current 7-8k parcels/day).

No changes to FY18-19E numbers. Post-visit, we made no changes to our forecast numbers, implying flattish bottom-line earnings for FY18- 19E despite revenue growth of 4-9% due to increased costs from its business expansions. Besides, due to early gestation phase, its courier services operations are expected to continue posting losses, with breakeven expected by 2021.

Maintain OUTPERFORM, with unchanged DCF-derived TP of RM0.90, based on the assumptions of: (i) 5.8% discount rate, and (ii) 1% terminal growth.

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) its 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 80-73x and 32- 27x 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 - 9 Apr 2018