• E-commerce delivery (B2C) players are facing yield pressures

• GDEX shielded by its presence in the B2B segment

• Expansion remains on track, with some changes

• GDEX is looking to regain its Shariah-compliant status

• GDEX could exercise its equity conversion sooner

• Maintain NEUTRAL with TP of RM0.70

E-commerce delivery (B2C) players are facing yield pressures as a slew of new entrants enter the market and existing players add capacity This has worked in favour of e-commerce platforms who gain bargaining power in negotiating for lower delivery rates. Exacerbating matters are platforms like Lazada who continue to grow at blazing speed, doubling its sales in 2016 with a similar target for 2017. As volumes grow, E-commerce platforms are able to negotiate thinner rates with express delivery partners in return for a share of its large parcel volumes.

Shielded by its presence in B2B segment. For GDEX, whilst the B2C segment has been its key growth driver in recent years, the bulk of its revenue remains anchored on its B2B business (clients: Banks, Telco’s, MNC’s and SME’s), which it derives 70% of its revenue. GDEX’s emphasis on the B2B segment enables it not to overly pursue B2C contracts, instead allowing the market to consolidate. In the meantime, GDEX continues to expand its sorting capacity, improve the quality of its service, and enhance its IT systems. To ride out any potential volatility, GDEX has a rainy day fund of RM277.6m.

More upgrades in the works at its PJ sorting hub. Initially, GDEX had planned to set up a new sorting hub in Sungai Buloh by 1HFY18 (2HCY17) with additional capacity of 60k parcels per day. However, GDEX is now exploring a more cost-effective method of upgrading its PJ sorting hub which would give it similar capacity additions. In addition, GDEX has obtained the permit to grow its vehicle fleet by another 200 trucks, which could boost its fleet from 864 to >1,000 by end-2017.

Regaining its Shariah-compliant status is a priority. In May 2017, GDEX saw its Shariah-compliant status removed, as its cash over total assets in conventional accounts breached the 33% limit. The removal prompted a brief selloff which saw the company’s share price dip -7.7% in the ensuing 3 trading days. Keen to regain the Shariahcompliant classification in the next update in Nov 2017, GDEX has taken the required steps to fulfil the requirements, pending an evaluation by the Shariah Advisory Council.

GDEX could exercise its equity conversion sooner than required. GDEX’s Indonesian investment consisting of RM10m for a 5-year bond convertible into 40% equity in PT SAP Express continues to make good progress - with recurring business secured for the B2B segment and inroads being made into the e-commerce segment in Indonesia. Emphasis is currently being placed on improving its 1) cash flow position, 2) reporting standards and 3) IT systems, with guidance provided by GDEX’s management team. Once the company is on stable footing, GDEX could consider exercising its equity conversion which might take place ahead of the 5-year conversion period.

Maintain NEUTRAL with TP of RM0.70. We value the company using a 2-stage discounted cash flow method (DCF) which assumes 1) WACC of 8.5%, 2) high growth period 2020-2027 of 9.5% and terminal growth rate of 3.5%. GDEX has had an outstanding run, with its share price ascending 60% year-to-date. We believe the company is fully valued for now, hence our NEUTRAL recommendation.

Source: MIDF Research - 7 Aug 2017