We came back from CJCEN’s results briefing feeling neutral on its short-to-medium term earnings prospect due to start-up losses from its courier business as well as margin compression on stiff competition. That said, we lowered FY18-19 earnings estimates by 5.4-4.8% while anticipating breakeven for its courier business in 2021 should its upcoming multi-storey warehouse meets full capacity expectation. Reiterate MARKET PERFORM with a revised target price of RM0.520.

3Q18 results recap. Recall that CJCEN earlier posted 9M18 earnings, which declined 22% YoY. The slump was largely due to: (i) start-up costs from its courier business, which recorded a 9M18 loss of RM4.9m, and (ii) lower warehouse utilisation for its logistics business which saw earnings declining 13% YoY, led by operating margin compression of 2.9ppt to 5.0% from 7.9%. However, sequentially, earnings recovered by an impressive 43% QoQ, led by stronger procurement logistics business (+43%) on the back of higher export sales as the company secured new key clients.

Multi-storey warehouse as a decisive element. Post-briefing, we gathered that construction progress for the upcoming multi-storey warehouse is on track at 70% completion rate with operations to commence in 3Q19. With the ground floor gazetted for its courier business’ main sorting hub, capacity is expected to see a lift to 150- 200k parcels/day from the current 10k parcels/day. That said, we reaffirm our view on the upcoming facility being a crucial element for the eventual success of its courier services venture. Nevertheless, continual losses from its courier business are expected to persist alongside its expansion costs, with anticipated breakeven only expected in 2021, should the company manage to reach at least 100k parcels/day volume by then.

In the meantime, earnings will have to be buoyed by its warehousing logistics and procurement logistics arm – the latter having managed to secure key new customers recently. We believe this would boost segmental orders by two fold for FY19, further underpinned by CJCEN’s investment in a new assembly line to cater for additional orders. Overall, we expect the segment to grow c.45% for FY19, with warehousing logistics remaining flattish while courier services continue to see wide losses.

Flattish medium-term earnings outlook. Moving forward, we take a relatively conservative stance as short to medium-term earnings are expected to be flattish due to: (i) continual losses expected from its courier business with anticipated breakeven in 2021, (ii) compressed margins due to intensifying competition within the industry, (iii) weakened total logistics business. Despite buffer provided by its stronger procurement logistics business, we opt to revise our FY18-19E earnings downwards by 5.4-4.8% to account for lower earnings contribution from its total logistics business as margins continue to be compressed by under-utilisation of its warehousing capacity in the Port of Tanjung Pelepas area.

Maintain MARKET PERFORM with lower DCF-derived TP at RM0.520 (from RM0.750 previously), following earnings cut and readjustment of discounting rate to 6.5% from 5.8% to account for the rising uncertainties with the increasingly competitive logistics industry following the entry of new players. Overall, we maintain our relatively conservative stance by acknowledging potential near-term earnings risks stemming from its weakened logistics business coupled with start- up losses for its courier services while reiterating our view on CJCEN being a longer-term e-commerce play.

Risks to our call include: (i) better-than-expected growth in total logistics business, (ii) lower-than-expected growth in procurement logistics business and (iii) sooner-than-expected breakeven from courier business

Source: Kenanga Research - 29 Nov 2018