INVESTMENT HIGHLIGHTS

• 1QFY20 results of RM0.8m came in below estimates

• International segment PBT impacted by lower shipment for AFF segment

• Domestic segment performance cushioned by contract logistics

• Revise earnings downwards due to expectation of lower performance of AFF segment

• Revert to NEUTRAL with revised TP of RM1.22 per share

1QFY20 normalised PATAMI below estimates. Tasco recorded 1QFY20 normalised PATAMI of RM0.8m (-84.0%yoy). This was below ours and consensus’ estimates by a variance of more than -10%. The deviation is mainly attributable to higher operating costs and finance costs for the cold supply chain (CSC) business which is fully financed by bank borrowings.

International segment revenue increased by +1.2%yoy in 1QFY20. PBT of Tasco’s air freight forwarding (AFF) segment declined by -50.4%yoy due to the drop in shipments of capacitor and chemical customers coupled with intense competition within the industry. Nevertheless, the PBT of the international segment was supported by the ocean freight forwarding business which returned back into the black with a PBT of RM0.6m (>+100%yoy) contributed by export shipments from solar panel, aerospace and healthcare customers.

CSC and trucking business experienced a blip… PBT of the domestic business segment decreased by -42.4%yoy in 1QFY20, mainly contributed by the trucking division. Higher fixed operating costs and lower deliveries for E&E, cigarettes and automotive parts customers pushed the trucking division into a loss before tax of -RM1.6m in 1QFY20. This is in contrast to a PBT of RM0.7m seen a year ago. The cold supply chain (CSC) business recorded a +35.5%yoy increase in revenue underpinned by strong demand for the service. Nevertheless, the PBT declined by -57.5%yoy in the same period due to the internal reorganisation. Note that the lossmaking convenience retail business was transferred to the CSC business from the warehousing business effective 1st April 2019.

…but contract logistics business cushioned the domestic business segment. Meanwhile, other sub-segments such as the contract logistics business experienced a +5.7%yoy increase in PBT in 1QFY20. The subsegment’s performance was supported by the warehousing, in-plant and haulage businesses which outweighed the decline in custom clearance due to reduced shipments from a solar panel customer and cessation of business with an energy manufacturer.

Earnings estimates. We are adjusting our earnings estimates downwards for FY20 and FY21 to RM9.1m and RM21.0m from RM21.0m and RM25.4m respectively. This is taking into consideration lower revenue growth due to the performance of the AFF segment which is expected to be under pressure in light of global trade uncertainty and intense competition for the trucking division locally.

Target price. We are revising our target price to RM1.22 per share (previously RM1.68 per share) as we roll forward our valuation base period to FY21 and adjust our earnings forecasts downwards. Our target price is derived by pegging our FY21 EPS to a forward PE ratio of 12.0x which equates to the average forward PE ratio of its peers.

Revert to NEUTRAL. The unresolved trade dispute between the U.S and China will continue to pose uncertainty in global trade. While this prompts a diversion of trade especially for semiconductor products from China to ASEAN countries, the benefits have so far been observed by Vietnam due to its cheap labour costs and closer proximity to China. As such, we believe that semiconductor shipments from Malaysia which are mainly transported via air freight are expected to see a slowdown amidst competition from Vietnam. Meanwhile on the local front, annual savings of interest cost from 30% divestment of Tasco’s CSC business to JOIN would be impacted by the high financing costs of acquiring the CSC business and the Westport Logistics Centre. Nonetheless, this would be cushioned by the internal reorganisation mentioned earlier which aimed was to expand the clientele of the CSC business to include convenience stores, petrol kiosks and pharmacies. All things considered, we are reverting to a NEUTRAL stance from Trading BUY previously.

Source: MIDF Research - 23 Aug 2019