INVESTMENT HIGHLIGHTS

• Results below expectations

• Express delivery continues growing

• Huge decline in PBT of logistics services

• Revise earnings downwards

• Maintain NEUTRAL with reduced TP of RM0.49 per share

Results below expectations. GDEX’s 3QFY18 revenue of RM73.4m grew by +19%yoy while the normalised net profit reduced by -67%yoy to RM2.6m, the lowest ever recorded since 2013. GDEX’s cumulative 9MFY18 earnings of RM17.1m lagged expectations, representing only less than 50% of our and consensus full year earnings estimates. The decline in earnings was mainly due to: (i) higher operating expenses required for network expansion; and (ii) the higher tax rate of 71% following the expiry of GDEX’s pioneer status tax incentive in September 2017 which led to an additional tax provision in view of a possible clawback of tax incentive in 2017.

Express delivery continues growing. In 3QFY18, the express delivery business staged a commendable growth of +19%yoy and +10%yoy in its revenue and PBT, respectively. The growth was mainly driven by positive sales volume partly buoyed by festive season in February.

Logistics services affected by value added services. Revenue of the logistics business grew by 24.1%yoy in 3QFY18 but its PBT substantially declined by -72.8%yoy. The huge decline in the PBT is due a contract arrangement with major customer that subscribes the value added services from the logistics business to support the express delivery business but the payment is still made for express delivery business. Due to the increase in volume by the customer, more cost is incurred by the logistics business to fulfil the value added service without increasing its revenue.

Property investments. The property segment registered income of RM287m net in 3QFY18 contributed by Abric Properties. However, the segment posted a loss before tax of –RM1.28m mainly offset by maintenance expenses incurred for other properties owned by GDEX. Prior to the acquisition of ABRIC Properties, the maintenance costs for property were parked under expenses

Looking ahead. We reckon that PAT margins may continue to face compression for the rest of the year, assuming expansions plans are still being carried out. Hence we are revising our earnings forecasts downwards by -9.7% for both FY18 and FY19 as we conservatively increase the operating expense by 10% for FY18 and FY19.

Maintain NEUTRAL with reduced TP of RM0.49 per share (previously RM0.53 per share). We reduce our TP to RM0.49 from RM0.53 previously as we increase our estimates for operating expenses. We value the company using a 2-stage discounted cash flow method (DCF) which assumes a WACC of 8.6%, and terminal growth rate of 2.5%. While we are sanguine on the company’s expansion plans in the face of competition, valuations remain elevated at a FY19F PER of 79.6x, hence our NEUTRAL recommendation. Rerating catalysts for GDEX would be: (i) early conversion of bonds to equity which will result in a 40% equity stake in PT Satria Antaran Prima and; (ii) inclusion into SC’s list of Shariah-compliant stocks.

Source: MIDF Research - 15 May 2018