TRIMODE is a Malaysian based logistics provider, primarily engaged in the sea freight and container haulage business. Via an IPO, it is seeking to raise RM26.4m, implying a market cap of RM101.3m upon listing, with bulk of the proceeds for business expansions. Historically, TRIMODE had registered superior earnings growth compared to industry peers, with our FY18-19E forecasts implying a 5-year CAGR of 26%. We are ascribing a TP of RM0.74, based on 15x PER on FY19E earnings.

Freight and logistics services provider. Seeking listing on the ACE market, Tri-Mode System (M) Berhad (TRIMODE) is primarily engaged in the provision of freight and logistics services. As at FYE17A, sea freight and container haulage contributed the bulk of the company’s gross profits at 51% and 37%, respectively. Other segments include air freight (9%), freight forwarding (1%), warehousing (2%) and marine insurance (<1%). Revenue is primarily derived from Malaysia (c.90%).

Bulk of IPO proceeds for business expansions. Of the RM26.4m raised through IPO, 57% of it will be allocated for the construction of a proposed HQ and distribution hub, with estimated completion by 3Q20. Post-completion, this will contribute an additional 50-55k sq ft in warehousing capacity to the company’s current capacity of 11.8k sq ft. Nonetheless, the premise is expected to bring costs saving benefits and improved efficiency as the company seeks to consolidate its operations under one roof. Additionally, it comes with a larger parking area for its fleet, and in-house repair workshops to facilitate growth for its container haulage segment, with 2% of the IPO funds allocated for haulage fleet expansion.

Superior earnings growth with dividend policy. Our FY18-19E net profit of RM7.1-8.2m implies a 5-year CAGR of 26%. For the past two years (FY15-17A), TRIMODE displayed strong annual PBT growth of 17%/29%, which is superior among industry peers. Comparatively, TRIMODE’s two closest comparable peers, FREIGHT and XINHWA, posted earnings growth of -1%/+6% and +1%/-37%, respectively, while integrated logistics players TASCO and CENTURY posted 0%/0% and 0%/-32% earnings growth respectively. The company had also indicated a dividend policy of 30%, translating to DPS of 1.3-1.5 sen for FY18-19E (implying 2.1-2.4% dividend yields based on IPO price of RM0.61). Additionally, balance sheet appears healthy, with the company poised to be in net-cash position going into FY18-19 (from current net gearing of 0.3x), with RM5m of the IPO proceeds used for borrowings repayment.

NOT RATED, with TP of RM0.74, based on FY19E PER of 15x. We derived our PER valuation based on a blended benchmark against two of its comparable peers with highly similar business operations. They are: (i) FREIGHT (trading at 9x PER on FY17A), which is predominately engaged in freight services, with the bulk of its earnings derived from sea freight, and (ii) XINHWA (trading at 23x PER on FY17A), which is predominately engaged in trucking and haulage services. Our ascribed valuation is also in-line with other integrated logistics players’ average.

Main risk to our call includes greater-than-expected earnings growth.

Source: Kenanga Research - 19 Apr 2018