INVESTMENT HIGHLIGHTS

• FY18 results slightly below estimates

• International segment PBT dented by competitive freight charges

• Domestic segment revenue boosted by cold chain logistics

• Revise earnings downwards due to higher finance costs

• Maintain BUY with reduced TP of RM2.50 per share

FY18 normalised PATAMI slightly below estimates. Tasco recorded 4QFY18 normalised PATAMI of RM6.8m (+45.9%yoy), bringing its FY18 normalised PATAMI to RM32.5m (+15.3%yoy). This was slightly below our estimates, representing 94.1% of the full year forecasts but met consensus’ expectations at 98.0%. The slight deviation is attributed to higher finance costs for the new cold chain logistics business and increased professional and compliance expenses for corporate merger & acquisition exercises.

International segment revenue increased by +5.7%yoy in FY18. Tasco’s air freight forwarding revenue advanced by +0.3%yoy mainly due to the increased shipments of the semiconductor related products. The ocean freight forwarding business was doing equally well as it benefited from the increased import shipment from customers involved in office equipment, lighting and musical instruments, resulting in a +15.7%yoy increase in revenue. However, the PBT of the international segment declined by -12.7%yoy, dragged by competitive freight rates and surcharges in the ocean freight forwarding business.

Domestic segment boosted by CSC business. Domestic segment revenue and PBT rose by +34.4%yoy and +74.1%yoy respectively in FY18 as the cold chain logistics business via GCT posted an RM61.4m postacquisition revenue. Aside from that, the ongoing operations of the regional distribution centre for Renesas combined with a newly secured electrical appliance customer lifted PBT margins by +1.8ppts from a year ago. Both of these sub segments cushioned the +3.0%yoy increase in loss before tax incurred in the trucking division due to the fluctuation in fuel costs.

Update of MILS acquisition. In April 2018, all conditions precedent in the share purchase agreement for the purchase of MILS and six parcels of leasehold land in Pulau Indah had been fulfilled, making these acquisitions unconditional. Notwithstanding this, the completion of these acquisitions is subject to the settlement of the balance purchase consideration of approximately RM121.4m according to the share sale agreement. Tasco has secured financing for the balance purchase consideration on 21 May 2018. Therefore, we opine that these acquisitions will conclude by 2HFY19.

Prospects in FY19. Moving forward, margins of Tasco Berhad will be mainly supported by; (i) the full contribution of the cold chain logistics business comprising of GCT and MILS and; (ii) the regional distribution centre supported by Renesas’ growth in the chip market especially microcontrollers for electrified cars and driver assistance systems is expected to be strong as power efficiency becomes increasingly important as fuel efficiency amid tightening environmental regulations.

Earnings estimates. We are revising down our earnings estimates for FY19 by -4.8% to reflect higher finance costs for completing the MILS acquisition.

Maintain BUY with a reduced target price (TP) of RM2.50 per share (previously RM2.62 per share) with forward price-earnings (PE) ratio of 12x pegged to FY19 EPS of 20.8sen. Our 12x target for the forward PE ratio equates to the average forward PE of its peers as we practise conservatism in our valuation amidst increasing competition in Tasco’s traditional core business. We believe that Tasco’s impetus for growth lies in its newly acquired cold chain logistics assets which will grow with the regional distribution centre for Renesas in KLIA’s freight forwarding complex. Fundamentals of TASCO remain intact, trading at a forward PE ratio of 9.5x and a manageable net debt to equity ratio of 0.48x.

Source: MIDF Research - 25 May 2018