GDEX ended FY18 on a weaker note, mainly dragged by higher taxes. Near-term outlook remains clouded as earnings are expected to be partially impacted by worsening margins due to intensified industry competition. While we introduce our new FY20E numbers, we made no changes to FY19E in anticipation of tax rates returning to normal levels. Reiterate UNDERPERFORM, with an unchanged TP of RM0.350, as current valuations seem rich.

Below expectations. FY18 Net Profit of RM23.6m came in below expectations at 73% and 76% of consensus and our full-year estimates, respectively. The negative discrepancy was on account of higher-than- expected taxation due to prudent tax recognition following its tax incentive expiration. In fact, pre-tax results actually came in slightly exceeding expectations due to stronger courier volume growth coupled with seasonally stronger 4Q. Proposed first and final dividend of 0.20 per share is in line with our FY18 expectation.

Poorer FY18. All in, FY18 Net Profit recorded a YoY plunge of 36% to RM23.6m from RM36.8m. This was largely dragged by higher taxation with a 30 ppt hike in effective tax rate (ETR) YoY (47% versus 17% in FY17) coupled with deteriorating margin caused by increased competition within the industry which saw operating margin plunging 2.3 ppt YoY.

4Q18 Net Profit fell 43% YoY to RM6.5m from RM11.5m similarly due to the aforementioned higher taxes with ETR jumping from 21% to 54%. PBT was also worse off YoY by 3.8% mainly caused by compressed margin due to the increasingly saturated industry. Better performances were seen QoQ as Net Profit jumped 149% backed by a 53% surge in PBT while the company rode on the booming e-commerce scene. Notably, tax rates were seen gradually decreasing as ETR fell QoQ from 72% to 54%. Nonetheless, the stronger QoQ results were unsurprising given that 4Q had seasonally been a strong quarter.

Mixed outlook. Moving forward, tax rates are expected to return to normal levels as all tax penalty recognition is completed within FY18. We remain long-term positive on the company for its; (i) sorting capacity is expected to be expanded to 150k by the end of FY19 from the current capacity of 110-120k parcels per day, (ii) healthy balance sheet with a net cash position of RM286m that can be tapped to spur further growth expansions. Nonetheless, outlook is still clouded in the near-term as earnings are anticipated to be weighed down by worsening margins due to intensifying competition within the industry.

Maintain UNDERPERFORM with an unchanged DCF-derived TP of RM0.350, based on the assumptions of 7.8% discount rate and 5% TG. While introducing new FY20E numbers, we made no changes to FY19E in anticipation of tax rates returning to normal levels.

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

Source: Kenanga Research - 03 Sep 2018