1Q18 results came in grossly below expectations due to poorer performance from its existing logistics operations, while losses from its new courier services were largely expected. As such, we opt to take a more conservative stance, with our revised FY18-19E numbers factoring in all foreseeable negatives at this juncture. Downgrade to UNDERPERFORM, with lowered DCF-derived TP of RM0.65.

Below expectations. 1Q18 net profit of RM2.6m (-46% YoY and -25% QoQ) came in below expectations, making up only 17% and 16% of our and consensus full-year forecasts, respectively. While losses in its courier services were largely expected due to gestation period, the main disappointment came from its existing logistics operations, which we believe were caused by under-utilisation of its warehousing capacity and offshore vessels for its oil and gas logistics. No dividends were declared, as expected.

Overall poorer results. As previously mentioned, we believe the poorer results were due to increased costs, mainly stemming from: (i) under-utilisation of its warehousing capacity in the Port of Tanjung Pelepas area, (ii) decreased utilisation of its offshore vessels for its oil and gas logistics, and (iii) additional RM1.5m losses from its new venture in courier services. This was despite a revenue jump of 31% YoY/17% QoQ, helped by better performances from its procurement logistics, which we believe was due to the securing of new customers. Nonetheless, the increased costs led to margins deterioration at the group level, with operating margins sliding 6 ppt YoY.

Revised numbers factoring-in all negatives. While the losses incurred by its new courier services business were largely expected, the grossly poorer performance in its existing logistics operations was truly a negative surprise. This, coupled with earnings disappointments over the last few quarters, has prompted us to opt for a more conservative stance with our forecasts numbers, factoring-in all foreseeable negatives at this juncture by slashing our FY18-19E earnings by a 44-50%.

Downgrade to UNDERPERFORM. Following the earnings revision, our DCF-derived TP is cut to RM0.65, from RM0.90 previously, after rolling forward our valuation base year to FY19. Our valuations are based on the assumptions of: (i) 5.8% discounting rate, and (ii) 1% terminal growth. Our call is also downgraded to UNDERPERFORM, from OUTPERFORM previously. While we were previously bullish on the company’s longer-term prospects for its courier services venture; acknowledging its near-term earnings growth risk, the grossly worse-than-expected earnings performance, especially in its existing logistics operations, have compelled us to downgrade our call for now. With that said, given that our numbers have already factored in foreseeable negatives, any positive surprises from here may act as a valuation accretion factor. Risks to our call include: (i) recovery in warehousing capacity utilisation, (ii) increased utilisation in its oil and gas logistics, and (iii) sooner-than-expected breakeven in its courier services operations.

Source: Kenanga Research - 18 May 2018