GDEX posted overall weaker results, dragged by higher taxes due to prudent tax recognition following its tax incentive expiration, for which the company is seeking extension. Meanwhile, near-term outlook is expected to be weighed down by deteriorating margins from increased competition. Maintain UNDERPERFORM, with lower TP of RM0.35, as we believe current valuation is overplayed.

9M18 below expectations. 9M18 net profit of RM17.1m is seemed to be below expectations, accounting for only 47% of both our and consensus full-year estimates. This is despite taking into consideration earnings seasonality (e.g. 9M16 and 9M17 contributed only 62% and 69% of their full-year earnings, respectively, given seasonally stronger 4Q). The mismatch was due to higher taxes, coupled with lower-than-expected margins. No dividends were declared, as expected.

Results dragged by higher taxes. Cumulatively, 9M18 net profits plunged by 32% YoY mainly due to higher taxation, with an effective tax rate (ETR) of 44% versus 15% in 9M17. In fact, earnings actually improved on the PBT-level by 2% YoY. This was driven by an 18% jump YoY in revenue due to higher e- commerce delivery demand, offset by the deteriorating margins from increased competition.

Similarly, for the individual quarter of 3Q18, the plunge in net profit by 67% YoY was also mainly due to the higher taxes, with 3Q18 ETR of 72% versus 14% in 3Q17. PBT dropped only 2% YoY, caused by increased competition to impact margins amidst a 19% YoY growth in revenue. Sequentially, net profit plunged 60% QoQ, also mainly caused by higher taxes, coupled with 2Q being a seasonally stronger quarter due to the festive holidays.

The overall higher taxation seen in this FY was due to prudent tax expense recognition by the company following the expiration of its 5-year tax incentive. Management is currently in discussions with authorities on a possible extension.

Increased competition impacting margins. Moving forward into the short-mid-term, earnings are expected to be parried by continued decline in margins due to the increasingly intensifying competition. However, longer-term positives could include; (i) regional expansions to turn meaningfully earnings accretive, (ii) continued efforts of venturing into the C2C delivery, and (iii) net- cash of RM298m to be tapped to spur future growth expansions.

Maintain UNDERPERFORM. Post-results, we cut our FY18-19E earnings by 16-22%, after lowering our operating margins assumption. As such, our DCF-derived TP is also lowered to RM0.35 (from RM0.45 previously), based on the assumptions of 7.8% discounting rate and 5% TG.

While we like the company for its good management, we are sticking to our UNDERPERFORM call as valuations are seemingly rich at 104-94x forward PER, with earnings outlook also appearing increasingly uncertain.

Risks to our call include: (i) exponential courier volume growth beyond our forecasts, (ii) sooner-than-expected significant earnings materialisation from its potential acquisitions or inorganic growth, and (iii) lower-than-expected effective tax rate.

Source: Kenanga Research - 15 May 2018