INVESTMENT HIGHLIGHTS

• Seasonally weaker first quarter

• Operating expenses rose quicker than revenue

• Margins declined due to expenses from capacity ramp-up

• Maintain NEUTRAL with reduced TP of RM0.59 per share

Seasonally weaker 1QFY18. For 1QFY18, GDEX posted revenue of RM68.8m which was up +19%yoy while core net profit of RM7.9m was down by -3%yoy. This represents 17% of our and 19% of consensus full year earnings estimates. The first quarter is seasonally the weakest for GDEX as there were no major festivities to boost the e-commerce segment while there were many public holidays that affected the B2B segment.

Operating expenses rose quicker than revenue. The +19%yoy growth in revenue was mainly contributed by the logistics business (segmental revenue growth of +105%yoy) driven by increase in demand in warehousing services for e-commerce business. However, operating expenses outpaced revenue with a +21%yoy growth due to network and infrastructure expansion activity.

Margins declined due to expenses from capacity ramp-up. For its first quarter, both EBIT and PAT margins slipped by -3.1ppt-yoy and - 2.5ppt-yoy respectively. Nonetheless, we are not alarmed by the drop in operating margin as the increase in operating expenses to ramp up its capacity will enable the company to tackle the intense competition especially from express delivery segment.

Revise earnings downward. We are revising down our earnings estimates for FY18 and FY19 by -14.6% and -13.4%, respectively. This is to reflect the higher operating expenses incurred for its more aggressive growth in capacity.

Maintain NEUTRAL with reduced TP of RM0.59. We reduce our TP to

RM0.59 from RM0.70 previously as we trim our growth rate assumption for 2020-2027 from 9.5% to 9.0% amid the increasing competition in the express delivery industry. We value the company using a 2-stage discounted cash flow method (DCF) which assumes a WACC of 8.5%, and terminal growth rate of 3.5%. GDEX has had an outstanding run, with its share price ascending 50% year-to-date. We believe the company is fully valued for now, hence our NEUTRAL recommendation.

Source: MIDF Research - 21 Nov 2017