1Q19 plunged into unexpected losses of RM1.8m due to widening start-up costs and poorer total logistics business. While the company’s near-term outlook is set to remain clouded on persistent start-up losses and industry- wide margin compression, we expect upcoming quarters to see gradual recovery, on the back of better performances from procurement logistics business and total logistics business. Maintain UP with revised TP of RM0.370.

Surprising losses. CJCEN registered 1Q19 net loss of RM1.8m which came in below expectations, against ours and consensus’ full- year forecasts of RM9.4m and RM10.3m, respectively. The losses were largely due to widening expansion costs for its courier business coupled with weaker performances from its total logistics business. No dividend was announced, as expected.

Widening expansion costs. YoY, 1Q19 plummeted into losses of RM1.8m, from net profit of RM2.7m in 1Q18, largely dragged by: (i) thinning margins with operating margin falling 3.8 ppt to 0.3% as expansion costs widened for its courier business; with an addition of nearly 400 new workers over the year, and (ii) weaker total logistics business which saw EBIT plunged 52.6% to RM1.3m; dampened by weaker oil and gas segment with only 2 vessels employed for the quarter. This was despite a revenue jump of 37.1% to RM127.1m on the back of sturdier performance from its Procurement Logistics business (+88.6% YoY), helped by newly secured clients from Vietnam. Sequentially, losses in 1Q19 widened from RM0.2m in 4Q18 in spite of a 44.5% hike in revenue. Similarly, this was due to continual margin compression, which saw operating margin contracting 1.3 ppt from 1.6%, due to the aforementioned higher expansion costs and weaker performances from its total logistics business. Courier business continues to drag. With its parcel delivery business continuing to act as a dampener moving forward, earnings are expected to be largely buoyed by its procurement logistics business; until an eventual breakeven from its courier business can be expected, likely in FY21. We reiterate our view on its upcoming multi-storey warehouse in playing a crucial role in its courier business’ eventual success, with construction currently near completion and on-track to meet its expected operational commencement in 3Q19. The new warehouse is expected to boost capacity to 150k parcels/day from currently 10k parcels/day. While the company’s near-term outlook is set to remain clouded on persistent start-up losses and margin compression from intensified competition within the industry, we are expecting upcoming quarters to see gradual numbers recovery, on the back of improvements from its procurement logistics business and total logistics business. Maintain UNDERPERFORM, given its bleak outlook with little earnings catalyst at this juncture. Post-results, we cut FY19E-20E earnings by 16.7-15.6% after accounting for more conservative margins for its total logistics business and larger losses for its courier business. Our DCF- derived TP is also lowered to RM0.370 (from RM0.400 previously), implying 19x PER (in-line with its -1S.D. 3-year mean) based on: (i) 6.8% discount rate, and (ii) 1% terminal growth. Risks to our call are: (i) earlier-than-expected breakeven from courier business, and (iii) weaker-than-expected procurement logistics business.

Source: Kenanga Research - 27 May 2019