FY18 earnings (-42% YoY) came in below expectations, as 4Q18 plunged into losses due to start-up costs from its courier business coupled with margin compression amid heightened competition. Hence, we revised earnings downwards by 2.2% for FY19E while introducing new FY20E numbers. Downgrade to UP with TP of RM0.490 after a strong rebound as share price had rallied 36% despite lacking of earnings certainty going forward.

Below expectations. After stripping off one-off gain in disposal of PPE at RM1.0m, we arrived at FY18 core net profit (CNP) of RM8.8m (-42.2% YoY) which missed expectations at 92% and 80% of our estimate and consensus forecasts, respectively, mainly due to margin compression coupled with expansions costs for its courier business. Proposed dividend of 0.75 sen per share for FY18 was also below our forecast of 1.5 sen.

Hit by margin compression and start-up costs. As previously mentioned, FY18 core earnings took a plunge of 42.2% YoY, attributable to (i) compressed margins as operating margin deteriorated to 3.8% from 7.2%, which we believe was caused by under-utilisation of its warehousing capacity in the Port of Tanjung Pelepas area, coupled with (ii) increased direct operating expenses by 52.1% YoY, which included start-up costs for its courier business. This was despite a revenue jump of 36.1% YoY, helped by better performances from its procurement logistics business on the back of newly secured customers.

4Q18 turned red. Similarly, the aforementioned margin compression and start-up costs which led to a 21.2% YoY hike in direct operating expenses, turned 4Q18 into losses of RM0.2m from CNP of RM3.5m in 4Q17. Sequentially, the losses in 4Q18 against CNP of RM3.7m reported in 3Q18 was primarily due to a 24.4% decline in revenue owing to: (i) lower contribution from its procurement logistics services with revenue slipping 57.9% which we believe is due to seasonality factors, and (ii) lower revenue from its total logistics business due to lower utilisation in warehouse spaces.

Near-term outlook remains clouded. We note that the construction progress for the upcoming multi-storey warehouse remains on track at 80% completion rate with operations expected to commence in 3Q19. At full capacity, the new warehouse is expected to boost capacity for its courier services to 150k parcels/day, from the current 10k parcels/day. We believe this is crucial for its courier business to eventually break even in 2021 should average volume of 100k parcels/day are achieved. Nevertheless, we opine that the company’s near-term outlook will remain clouded due to the lack of major earnings catalysts underpinned by: (i) continual start-up losses from its courier business, and (ii) margin compression led by intensifying competition within the industry which is unlikely to recover in the near-term.

Downgrade to UNDERPERFORM with unchanged DCF-derived TP of RM0.490, implying a 21x PER based on: (i) 6.8% discount rate, and (ii) 1% terminal growth. Although it is currently trading near its mean PER, it is still not attractive given the bleak outlook with little earnings visibility. In addition, we reduced FY19E earnings by 2.2% to account for lower contribution from its procurement logistics business and introduced FY20E numbers. Risks to our call include stronger-than- expected growth in procurement logistics and higher-than-expected operating margin.

Source: Kenanga Research - 28 Feb 2019