INVESTMENT HIGHLIGHTS

• 1HFY19 normalised earnings exceeded our estimates due to gain from bond redemption of SAP Express

• Express delivery business partially buoyed by e-commerce demand

• Logistics services segment took a breather due to costs incurred for warehouse expansion

• FY19 and FY20 earnings revised upwards, premised on revised revenue growth

• Maintain NEUTRAL with revised TP of RM0.33 per share

1HFY19 earnings exceeded expectations. GD Express Carrier Berhad’s (GDEX) 1HFY19 normalised net profit increased by +18.5%yoy to RM17.2m. This came in better than our expectations, representing a variance of more than five percent as compared to our 1HFY19 earnings estimates. The positive deviation was mainly due to the higher other operating income due to the redemption from convertible bonds in SAP Express during the period under review.

Express delivery business lifted e-commerce demand. In 1HFY19, the express delivery business staged a commendable revenue and PBT growth of +8.1%yoy and the +21.8%yoy respectively. Apart from the redemption of convertible bonds of SAP Express. We view that the yearend mega online sales combined with year-end festive season boosted ecommerce demand. As such, the PBT margins of the express delivery segment in 1HFY19 expanded to 17.6% from 14.7% a year ago.

Logistics services remains subdued. On the contrary, the logistics business in 1HFY19 recorded a loss before tax of -RM0.3m. The performance was partly impacted from the costs incurred for its warehouse operations especially for Hub 2 in PJ and Mapletree Logistics Hub in Shah Alam. Currently, Hub 2 serves as a temporary transhipment centre for items from mega online sales.

Impact on earnings. As earnings came above expectations, we are prompted to revise our FY19 and FY20 earnings forecasts upwards to RM29.1m and RM33.9m respectively. This is after inputting higher average revenue growth rate assumption of 12.5% from 11.0% as we believe growth in the industry remains robust.

Target price adjusted to RM0.33. We are adjusting our TP upwards to RM0.33 per share (previously RM0.28 per share). We value the company using a 2-stage discounted cash flow method (DCF) which assumes a WACC of 11.0% and a higher terminal growth rate of 2.5% to reflect the growth in the Southeast Asian e-commerce industry which is expected to be worth USD102b by 2025.

Maintain NEUTRAL. GDEX’s healthy balance sheet has supported the group’s various expansion plan. This includes acquisition of a 44.5% stake in SAP Express, an Indonesian courier company and on-going effort to secure a partnership in Vietnam by the end of CY2019 facilitated by Webbytes through its cloud-based point-of-sale platform. Nonetheless, we view that earnings accretion from these ventures has yet to be meaningful as it has yet to undergone its gestation period. Meanwhile, valuation remains stretched at this juncture as compared to the average industry of approximately 17x. All factors considered, we are maintaining our NEUTRAL stance at this juncture. In the long term, rerating catalysts for GDEX would be: (i) slowdown in growth for last mile delivery start-up companies and (ii) stronger C2C business demand.

Source: MIDF Research - 26 Feb 2019