SWIFT’s 1HFY23 disappointed on additional cost incurred to support its fleet and warehouse expansion. 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 8% and 9%, respectively, trim our TP by 10% to RM0.87 (from RM0.97) but maintain our OUTPERFORM call.

1HFY23 core net profit came below expectations at only 41% and 44% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from additional cost incurred to support its fleet and warehouse expansion. The group declared an interim dividend of 0.8 sen for the 1H of the year, which is within our expectation.

YoY, 1HFY23 revenue grew 3% 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) gateway volume remained strong on the back of robust exports by local manufacturers spurred by MYR weakness (also manifested in a 13% YoY growth in gateway volume during the same period). However, core net profit declined by 19% due to higher operating expenses (+9%) and finance costs (+26%) to support its fleet and warehouse expansion.

QoQ, 2QFY23 revenue rose marginally due to reduced movement of goods during the local festivities (i.e. Eid-ul-Fitri and Eid-ul-Adha) resulted in higher demand for its warehousing and container depot (+13%) and freight forwarding business (+7%), which more than offset the lower demand for container haulage (-5%) and land transportation (0%). Core net profit rose more than revenue by 17% from lower effective tax rate of 16.2% (compared to 20.0% in 1QFY23) with the recognition of deferred taxation.

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 Port Klang Free Zone warehouse (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:

(i) cold chain warehouse in Sabah (from 27k sq ft to 57k sq ft; waiting for CCC by June 2023), on-dock depot (5 acres for 4,000 TEUs; completion by 2QCY23),

(ii) Westports’ on-dock depot (5 acres for 4,000 TEUs; completion by 2QCY23)

(iii) a warehouse in Mak Mandin, Penang (150k sq ft; completion by 1QCY24), Pulau Indah, Selangor (250k sq ft; completion by 1QCY24), and

(iv) 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 by 8-9%, imputing higher operating and finance costs to support its expansion, and TP by 10% to RM0.87 (from RM0.97) based on an unchanged FY24F PER of 14x, 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 value-adding 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. Maintain OUTPERFORM.

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 - 21 Aug 2023