SWIFT is bearing additional costs from its green initiatives, i.e. the investment in fully-electric prime movers and the upgrade of its internal combustion engine (ICE) prime mover fleet to the state-of the-art fuel-efficient Euro 5 model from Euro 3 model. It plans to eventually pass on these additional costs to its customers. We maintain our forecasts, TP of RM0.87 and OUTPERFORM call.

The key takeaways from SWIFT’s 2QFY23 results briefing yesterday are as follows:

1. SWIFT revealed that the higher-than-expected overheads in its just announced quarterly results were due to its green initiatives, namely: (i) the addition of two units of fully-electric prime movers (c. RM1.5m each), on-the-road by 4QFY23, which have attracted strong interest from certain European customers with strong ESG awareness, and (ii) the full upgrade of its ICE prime mover fleet to the state-of-the-art fuel-efficient Euro 5 model (c.5% reduction in CO2 emission over five years’ operation assuming 100km mileage per year) from the Euro 3 model by April 2024 (currently, SWIFT owns 1,546 prime movers). There was also a 10% increase in its staff strength to 3,629 from 3,300 prior to the expansion (1HFY23 staff cost at 11% of revenue, up from 8% of revenue in 1HFY22).

It hopes to eventually pass on all these additional costs to customers on rising utilisation of its fleet and warehouses. As such, SWIFT continued to guide for better margins ahead (assuming the occupancy rate of its warehouses to return to >80% by 2HFY23 and the full utilisation of its upgraded fleet by 1QFY24).

2. SWIFT echoed, once again, WPRTS’s guidance for a container volume growth of 0% to +5% for FY23, and single-digit growth for FY24. In the event of a global recession, it holds the view that it will be brief and shallow. As SWIFT depends more on gateway cargoes (compared with transhipment cargoes of WPRTS), it has stronger earnings visibility. We are keeping volume growth assumptions of 7% each for both FY23 and FY24, for its container haulage segment.

3. It is in the midst of moving its tenants currently housed in third-party warehouses (50k sq ft) to the newly completed PKFZ warehouse that will immediately boost the PKFZ warehouse’s occupancy rate to 45%. Meanwhile, it is at the final stage of discussion with its potential tenants to take up the unfilled space in both the PKFZ and Johor warehouses. It expects the overall warehouses occupancy rate to return to 80%-90% by 2HFY23 (current utilisation at 74% as at 1HFY23). We are keeping our assumptions of warehousing space of 1.4m sq ft in FY23 (+6%) and 1.8m sq ft in FY24 (+29%).

4. SWIFT reiterated that its land transportation business will continue to be driven by the increase in transportation services at Pengerang for Petronas with stable production level expected for 2023/2024. In addition, there is rising demand from key customers (i.e. IKEA and Lotus’s) on the recovery in the local retail sector. We are keeping our growth assumptions of 4% each for both FY23 and FY24, for its land transportation segment.

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).

Its on-going expansion plans include:

1. its cold chain warehouse in Sabah (from 27k sq ft to 57k sq ft; waiting for CCC by June 2023),

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

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

4. a warehouse in Mak Mandin, Penang (150k sq ft; completion by 1QCY24),

5. Pulau Indah, Selangor (250k sq ft; completion by 1QCY24), and

6. 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).

We maintain our forecasts and OUTPERFORM call with a TP of RM0.87 based on FY24F 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 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.

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 - 22 Aug 2023