INVESTMENT HIGHLIGHTS

• FY18 normalised earnings missed ours and consensus expectations in view of higher tax rate

• Margin of express delivery business slightly declined due to opex

• Improvement in PBT of logistics services

• Downward revision on FY19 earnings premised on new entrants

• Maintain NEUTRAL with reduced TP of RM0.44 per share

Annual earnings below expectations. GDEX’s FY18 revenue grew by +17.0%yoy to RM293.0m while the normalised net profit declined by - 32.4%yoy to RM25.1m representing less than 95% of our and consensus full year earnings estimates. The decline in earnings was mainly due to the higher annual tax rate of 47% in FY18 (vs 17% in FY17) following the expiry of GDEX’s pioneer status tax incentive in September 2017. The latter has led to an additional tax provision in view of a possible clawback of tax incentive in 2017.

Margin of express delivery segment slightly decline. In FY18, the express delivery business staged a commendable growth of +16.2%yoy and +5.3%yoy for its revenue and PBT respectively. The growth was mainly driven by positive sales volume partly buoyed by festive season in June 2018. However, higher operating expenditure for network expansion combined with immense competition in the industry caused the PBT margin of the express delivery segment to slightly decline to 17% from 19% a year before.

Logistics services boosted by courier volumes. Revenue of the logistics business in FY18 grew by a staggering +48.8%yoy, reversing the segment’s previously loss-making position with a PBT of RM0.6m. The improvement in PBT of logistics services was attributable to the growth and volume from the express delivery segment which led to the increase in value added services provided. Note that the logistics division functions as a supportive unit to provide value-added services to the express delivery segment.

Future prospects. We reckon that GDEX will continue to face profit margin compression in the coming quarters. This is premised on the assumptions that expansions plans are still being carried out and new entrants are increasing. Hence we are revising our FY19 earnings forecasts downwards by -6.0% to RM34.9m as we input a more conservative FY19 revenue growth assumption of less than 15%.

Maintain NEUTRAL with a reduced TP of RM0.44 per share. We are reducing our TP to RM0.44 from RM0.49 previously in-line with the reduction in our FY19 earnings. We value the company using a 2-stage discounted cash flow method (DCF) which assumes a WACC of 8.8%, and terminal growth rate of 2.0%. While we are sanguine on the company’s expansion plans in the face of competition, valuation remains elevated at a FY20F PER of 67.9x, 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; (ii) lower effective tax rate if new tax incentive is granted; and (iii) the development of Digital Free Trade Zone (DTFZ), located near KLIA. E-commerce will likely drive demand growth for air cargo and land logistics especially last-mile delivery services.

Source: MIDF Research - 3 Sept 2018