INVESTMENT HIGHLIGHTS

• 2QFY19 results below estimates

• International segment dragged by ocean freight forwarding business as customers opt for direct booking

• Domestic segment supported by cold chain and trucking.

• Revise FY19 and FY20 earnings downwards due to higher operating and finance costs

• Downgrade to NEUTRAL with revised TP of RM1.28 per share

2QFY19 normalised PATAMI below estimates. Tasco recorded 2QFY19 normalised PATAMI of RM2.5m (-72.5%yoy), bringing its 1HFY19 normalised PATAMI to RM7.7m (-52.2%yoy). This was below ours and consensus’ estimates by a variance of more than -10%. The deviation was mainly attributable to higher borrowing costs to finance for the cold supply chain (CSC) business and the land warehouse in Pulau Indah.

International segment revenue decreased by -20.4%yoy in 2QFY19. The drop was mainly due to the ocean freight forwarding business which recorded a loss before tax of -RM0.2m amidst: (i) the drop volume especially from a solar panel customer; and (ii) the preference of existing clients for direct sea shipment booking. Nonetheless, the discontinuation of a loss making business with an E&E customer in the air freight forwarding business helped pare the decline in PBT of the segment

Domestic segment buttressed by trucking and CSC business. The main driver for the segment was the CSC business which recorded a postacquisition revenue and PBT of RM25.2m (+37.3%yoy) and RM2.7m (+96.8%yoy) respectively. This translates into a reasonable PBT margin of 11%, marking its fourth consecutive quarter of being above 10%. To recall, the CSC business handles roughly 80% of all the domestic market for ice cream in Malaysia. The trucking segment recorded black ink for the third uninterrupted quarter, posting a staggering +100.4%yoy jump amidst cost-cutting measures.

…but contract logistics services took a breather. The contract logistics business experienced a -61.1%yoy decline in PBT. Factors for the lacklustre performance of the segment include: (i) low occupancy rate in warehouses located in Southern Region; (ii) higher operating expenses for the new retail business via the joint venture with Yee Lee Berhad; (iii) lower revenue from the regional distribution centre in KLIA. As a result, PBT of domestic segment saw a -35%yoy drop in its PBT to RM3.6m for 2QFY19.

Moving forward, we view that the regional distribution centre in KLIA to face headwinds as one of its clients, Renesas will experience a weak demand in 4QCY18 for its industrial equipment. As such, Renesas will cut its factory utilisation rate in order to reduce excess inventory especially for industrial equipment.

Earnings estimates. Although we note that Malaysia is a potential beneficiary if Chinese companies were to relocate their operations in the wake of the global trade friction, this would only be in the long run in our view. Henceforth, we are lowering our revenue growth estimates for the ocean freight forwarding division under the international business segment to exercise conservatism. Moreover, Tasco will continue to bear markedly higher financing costs related to the acquisition of the CSC business and warehouse in Pulau Indah and increased opex in its venture into convenience retail logistics. Taking all of these into consideration, we are revising down our earnings estimates for FY19 and FY20 to RM19.0m and RM27.0m respectively.

Downgrade to NEUTRAL with a revised target price (TP) of RM1.28 per share (previously RM2.21 per share) with forward price-earnings (PE) ratio of 9.5x (previously 11.0x) pegged to FY20 EPS of 13.5sen. Our revised valuation target represents our further conservatism in our valuation amidst increasing competition and uncertainty of global trade. While the retail business focuses mostly on petrol kiosks and convenience stores, which we reckoned its demand to be resilient, contribution is expected to be minimal to the bottom line. Nevertheless, we note that Tasco has a manageable net debt to equity ratio below 1.0x despite increased financing costs. All factors considered, we are downgrading our recommendation to NEUTRAL from buy previously.

Source: MIDF Research - 16 Nov 2018