SWIFT expects gradual improvement in port throughput volume starting 4QFY24 as port congestion is seen to ease, preluding greater recovery in 2025. Its other business segment will be continually driven by strong demand from FMCG customers, which is per expectation. However, we cut our margin assumption due to influx of irrational new logistics players undercutting prices, and unfavourable land transport business mix skewed toward shorter and less profitable route. We cut our FY24 and FY25 net profit forecasts by 11% and 9%, respectively, reduce our TP by 10% to RM0.45 (from RM0.50) but maintain our MARKET PERFORM call.

We came away from SWIFT's 3QFY24 results briefing yesterday feeling pessimistic. The key takeaways are as follows:

1. SWIFT believes the prolonged conflicts in the Middle East will continue to weigh down on the Asia-Europe trade, echoing WPRTS's guidance for a flattish container volume growth rate in FY24 (vs. our container haulage segment growth assumption of 5% as it handled more local container boxes compared to WPRTS). As of 9MFY24, its segment growth is at 5% which is on track to meet our target. Looking ahead, it is slightly more positive on FY25, guiding for a low single-digit container volume growth rate (vs. our container haulage segment growth assumption of 5%). However, we cut our segment margin assumption to 6% (from 7%) for both years due to pricing competition with the influx of new irrational logistics players (new Chinese manufacturing companies in-house logistics fleet).
2. It recently acquired, in Perai, Penang, a warehouse in August 2024 (118k sq ft) which is currently tenanted to a local logistics player (100% utilisation) which is below market rate. It already secured a new tenant for June 2025 with a better rental yield rate. Its new warehouse in Westport (260k sq ft) commenced operations on 1 Mar 2024 with 70% of space taken up by Sharp (distributor of white goods), 20% filled by a new FMCG customer in May 2024, and the remainder to be filled with ad-hoc customers. Meanwhile, its Tebrau warehouses (200k sq ft) has onboarded a new FMCG customer in October 2024, which had been delayed from April 2024 as the customer intends to take a larger space (requiring renovation). This should boost its occupancy rate to 70% (from 30%). It hopes to lease the remaining 30% to Singapore-based businesses as distribution hubs, given the warehouse's proximity to Tuas Second Link. The occupancy rate of its PKFZ warehouse (178k sq ft) rose to 90% (vs. 80%, three months ago). In terms of total warehouse space, we maintain our assumption of 1.7m sq ft in FY24 (+30%) and 1.9m sq ft (+17%) for FY25.
3. SWIFT will continue to leverage on its new shareholder, Thailand- listed SCGJWD Logistics PCL, to expand its cross-border trucking.

Leveraging the latter's wide logistics network in Thailand, it onboarded one such maiden customer, i.e. Sharp, for its land transportation service in Mar 2024, in addition to warehousing service in Westport. However, its margin eroded due to unfavourable mix toward shorter route i.e. its Singapore operation (higher volume but lower margin) while its usual longer routes (better margin) for major customers i.e. Lotus and Ikea saw lower volume due to intense competition between logistics players.

We maintain our volume growth assumption of 6% for both FY24 and FY25 for its land transportation segment but cut our segment margin assumption to 4% (from 5%) for both years.

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), Port Klang Free Zone warehouse (178k sq ft), cold chain warehouse in Sabah (from 27k sq ft to 57k sq ft, Westport on-dock depot (5 acres for 4,000 TEUs), Westport warehouse, Pulau Indah, Selangor (260k sq ft; operation started in Mar 2024), and another warehouse in Seberang Perai, Penang (118k sq ft; acquisition completed in Aug 2024), as well as commenced warehouse management and transportation services in Pengerang for Petronas (c.1.17m sq ft). We expect SWIFT to further its expansion in the northern region, i.e. Kedah, due to the recent increase in the FDI there.

Its on-going expansion plan includes the biggest green logistics hub in Asia (outside China) under 30%-associate GVL (first phase of 2.8m sq ft by Nov 2025 and 6.0m sq ft when fully completed by 2028) which is on track and expected to contribute to its earnings starting 4QFY25 (1-2 months contribution) and the new Perai, Penang warehouse (200k sq ft), currently under construction, expected to be completed by end-2025.

Forecasts. We cut our FY24 and FY25 net profit forecasts by 11% and 9%, respectively. Note that, our forecasted net profit is significantly lower than consensus as we reflect lower and more cautious EBIT margin assumption from the recently guided intense competitive landscape.

Valuations. We also trim our TP by 10% to RM0.45 (from RM0.50) based on unchanged FY25F PER of 10x, in line with the average forward PER of the local logistics sector. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. 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 7% compared to the industry average of 4%, and (iii) the tremendous growth potential of its warehousing business, riding on the booming domestic e-commerce. However, we believe the current market valuations have fully reflected its fundamentals. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 15 Nov 2024