SWIFT’s 1QFY23 disappointed on additional staff cost incurred to support its fleet and warehouse expansions. Its top line continued to grow, driven by the economy reopening and strong petrochemical product and gateway cargo volumes. We cut our FY23-24F net profit forecast by 14-8%, trim our TP by 3% to RM0.97 (from RM1.00) but maintain our OUTPERFORM call.

1QFY23 core net profit came below expectations at only 17% and 18% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from additional staff cost incurred to support its fleet and warehouse expansion.

YoY, 1QFY23 revenue grew 6% driven by: (i) the economy reopening, (ii) increased transportation activities for petrochemical products, particularly for the Petronas group of companies (close to 20% of revenue), and (iii) a strong gateway volume on the back of robust exports by local manufacturers spurred by MYR weakness (also manifested in a 6% YoY growth in gateway volume during the same period).

However, core net profit declined by 27% due to: (i) higher operating expenses (+16%) stemming largely from the expansion of its workforce as mentioned, and (ii) a higher effective tax rate of 20.0% (compared to 15.1% in 1QFY22).

QoQ, 1QFY23 revenue rose 3% driven by local festivities (i.e. Chinese New Year, pre-Ramadhan and pre-Hari Raya Aidilfitri inventory restocking activities) resulting in stronger demand for container haulage (+4%) and land transportation (+11%). Increased movement of goods during the local festivities resulted in less demand for its warehousing and container depot (-6%) and freight forwarding business (-18%). Core net profit fell 11% due to higher operating expenses as aforementioned.

Still in expansion mode. SWIFT has completed the expansion of its warehouses in Tebrau (from 108k sq ft to 308k sq ft), Seberang Prai (from 113k sq ft to 222k sq ft), and is building a warehouse in Port Klang Free Zone (178k sq ft), as well as commenced warehouse management and transportation services in Pengerang for Petronas (c.1.17m sq ft). It is in the midst of expanding its cold chain warehouse in Sabah (from 27k sq ft to 57k sq ft; completion by 2QCY23), Westports’ on-dock depot (5 acres for 4,000 TEUs; completion by 2QCY23), a warehouse in Mak Mandin, Penang (150k sq ft; completion by 1QCY24), Pulau Indah, Selangor (250k sq ft; completion by 1QCY24), and the biggest green logistics hub in Asia (outside China) under associate GVL (first phase of 2.8m sq ft by May 2025, 6.0m sq ft when fully completed by 2028).

Forecasts. We cut our FY23-24F net profit forecast by 14-8% imputing higher operating cost to support its expansion.

However, we trimmed our TP by only 3% to RM0.97 (from RM1.00) as we roll forward our valuation base year to FY24F (from FY23F). Our revised TP is based on an unchanged PER of 14x which is in line with the average forward PER of local logistics companies (i.e. TASCO, and TNLOGIS). There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

We still like SWIFT for: (i) its leading position in the Malaysia haulage market commanding close to 10% share, (ii) its valueadding integrated offerings resulting in a superior pre-tax profit margin of c.10% compared to the industry average of 4%, and (iii) the tremendous growth potential of its warehousing business, riding on the booming domestic e-commerce.

Risks to our call include: (i) sustained high fuel cost, (ii) global recession hurting the demand for transportation service, and (iii) delays in its primary warehousing expansion plan.

Source: Kenanga Research - 11 May 2023