1H19 plummeted into losses of RM4.8m, due to widening expansion costs for its courier business and weaker total logistics operation. With the group’s near-term outlook anticipated to remain clouded by persistent start-up losses and industry-wide margin compression, we cut FY19-20E earnings to losses of RM8.3m-RM3.6m. Maintain UP with lower TP of RM0.300 (from previously RM0.370) as we changed our valuation basis to PBV.

Missed expectations. CJCEN recorded 1H19 net loss of RM4.8m, which came in below expectations, against our and consensus’ fullyear earnings estimates of RM7.4m and RM7.5m, respectively. The drastic deviation is largely attributed to larger-than-expected losses for its last-mile delivery business and weaker total logistics business. No dividend was announced, as expected.

Back-to- back losses. YoY, 1H19 plunged into losses of RM4.8m, from net profit of RM5.4m in 1H18. The losses largely stemmed from: (i) widening start-up costs for its courier business, which further dampened the segment’s losses before interest and tax (LBIT) to RM8.1m (versus RM3.1m in 1H18), and (ii) weaker total logistics business which saw EBIT margins compressed by 3.6ppts to 1.4%. However, revenue was higher by 34% to RM263.8m thanks to sturdier performance from its procurement logistics business (+75% YoY), likely due to higher export activities.

Sequentially, losses in 2Q19 widened to RM3.0m from RM1.8m in spite of an 8% jump in revenue, similarly due to the aforementioned reasons.

Challenging outlook ahead. We gathered that its upcoming multistorey warehouse is slated to commence operations by the end of Sep 2019. 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 breakeven 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.

Maintain UNDERPERFORM with a lower Target Price of RM0.300. Post-results, we cut our FY19E-20E earnings to losses of RM8.3- RM3.6m after imputing more conservative margins for its total logistics business and larger losses for its courier business. That said, we also do not expect any dividend pay-out in these two years.

Due to earnings volatility, we are switching our valuation methodology to PBV basis. Our new TP is based on FY20E BV/share of 8.0 sen while we apply a PBV of 0.4x which is somewhat in-line with its 5-year historical trough levels. Our new TP is at a 20% discount to its DCFdriven TP of RM0.370. We believe our call and TP are justified given its bleak outlook with little earnings catalyst at this juncture.

Risks to our call are: (i) earlier-than-expected breakeven from courier business, and (iii) stronger-than-expected total logistics business.

Source: Kenanga Research - 23 Aug 2019