2Q18 results beat expectations due to better-than-expected procurement logistics operations. Moving forward, we maintain our positive view on CJCEN being a longer-term e-commerce play, while also acknowledging possible near- term earnings risks due to its weakened logistics business coupled with start-up losses in its courier services. Post- results, we raised FY18-19E earnings by 17-19%. We also upgraded our call to MP with a higher TP of RM0.75.

Above our expectations. 2Q18’s net profit of RM2.8m (+5% QoQ and -7.9% YoY) came in slightly above our expectation, accounting for 62% our full-year forecast. This was due to better-than-expected performance from its procurement logistics. However, results came in below consensus at only 39%. We believe the discrepancy is due to the market being overly-bullish with its logistics business growth. Proposed dividend of 0.5 sen per share for 1H18 also slightly exceeded our expectation (against prior FY18E DPS of 0.7 sen).

Stronger procurement logistics. 2Q18 net profit fell 7.9% YoY, mainly led by increased costs from its warehousing logistics operations, which persisted since last quarter and new courier business, which registered losses of RM1.6m, masking improved performances from its procurement logistics (segmental EBIT jumped 2.1x YoY). Cumulatively for 1H18, net profit fell 31% YoY as a result of poorer total logistics operations (-61% YoY), particularly in 1Q18, coupled with courier services operations’ losses of RM3.1m. Sequentially, net profit rise 5% QoQ as its total logistics services managed to partially recover from a disastrous 1Q18 (segmental EBIT +18% QoQ), coupled with improved performances from its procurement logistics (+9% QoQ).

Earnings adjusted upwards for FY18-19. On a separate Bursa filing, CJCEN announced the purchase of courier assets from CJ Korea Express Malaysia Sdn Bhd, amounting to c.RM1.8m. While we believe this would pose minimal impact towards its net-gearing of 0.2-0.3x for FY18-19E, we believe the move could help expedite CJCEN’s expansions within the parcel delivery space. All-in, we are expecting a breakeven in its courier services venture by FY21. Meanwhile, despite taking a relatively conservative stance after earnings disappointment last quarter, we have decided to bump FY18-19E earnings by 17-19% post-2Q18 results to account for the improved performances from its procurement logistics business. Our numbers have also imputed roughly RM6m losses per annum r for its courier services venture.

Upgrade to MARKET PERFORM and raised DCF-derived TP to RM0.75 (from RM0.65 previously), based on: (i) 5.8% discounting rate, and (ii) 1% terminal growth. As the previous numbers have already factored in all negatives, better-than-expected earnings performance this time round, particularly from its procurement logistics operations and the continual expansion in its courier services operations have prompted us to upgrade our call for now. Overall, we maintain our mildly positive view on CJCEN being an assuring e-commerce play over the longer-term, while also acknowledging potential near-term earnings risks stemming from its weakened logistics business coupled with start-up losses for its courier services.

Risks to our call include: (i) lower-than-expected growth in procurement logistics business, and (ii) over-optimism in courier service venture.

Source: Kenanga Research - 27 Aug 2018