INVESTMENT HIGHLIGHTS

• FY19 normalised earnings exceeded expectations but was mainly due to reinstatement of pioneer status tax incentive

• Express delivery business partially buoyed by e-commerce demand during the festive season

• Logistics services segment remains in the red due to the costs incurred for warehouse maintenance and rental to fulfil “value added services”

• Earnings forecast tweaked due to housekeeping

• Maintain NEUTRAL with an unchanged TP of RM0.30 per share

FY19 earnings exceeded expectations. GD Express Carrier Berhad’s (GDEX) FY19 normalised net profit increased by +6.7%yoy to RM31.1m. This exceeded ours and consensus’ expectations, accounting for 106.9% and 124.4% of full year forecasts respectively. The main reason for the positive deviation was the reinstatement of pioneer tax status tax incentive which ended 30 September 2017. However, the PBT in FY19 was -70.6%yoy lower.

Express delivery business lifted by festive season. In FY19, the express delivery business had a decent revenue growth of +7.6%yoy. We view that the support came from e-commerce demand boosted by festive season in May and special sales event such as Lazada’s 6th anniversary. However, PBT growth of the segment went down by - 20.1%yoy due to deterioration in revenue yield as a result of intense price competition from new entrants and a net share of loss in its associated companies. As such, PBT margins of the express delivery segment in FY19 declined by -4.1ppts to 12.7% from a year ago. Based on the latest data from the Malaysian Communications and Multimedia Commission (MCMC), the number of courier licence holders remains high, at 112 as of August 2019.

Logistics services remains subdued. On the contrary, the logistics business in FY19 recorded a loss before tax of –RM1.9m compared to a PBT of RM0.7m in FY18. The lacklustre performance was partly impacted from the higher maintenance costs incurred for its warehouse operations especially for Hub 2 in PJ and rental costs for warehouses such as Mapletree Logistics Hub in Shah Alam. All of these costs were necessary to provide higher “value added services” to the customers in the express delivery segment without its revenue being recognized by the logistics services. Instead, the corresponding revenue was recorded by the courier segment.

Earnings forecast. Our FY20 earnings estimates are slightly tweaked downwards to RM33.0m (previously RM33.9m) due to housekeeping and not from any change in assumptions. We also introduce our FY21 earnings forecasts of RM35.1m.

Target price. We are maintaining our TP at RM0.30 per share as our revision in earnings did not constitute any material changes. We value the company using a 2-stage discounted cash flow method (DCF) which assumes a WACC of 12.0% to reflect the risk from the ongoing intense competition driven by the growth in the Southeast Asian ecommerce industry which is expected to be worth USD102b by 2025.

Maintain NEUTRAL. GDEX’s healthy balance sheet has supported the group’s various expansion plans. 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 the earnings accretion from these ventures has yet to be meaningful as both are still in gestation period. Meanwhile, valuation remains stretched at a 12-month trailing price-to-earnings ratio of 45.1x compared to the average industry of approximately 10.0x to 15.0x. 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 consumer-to-consumer (C2C) business demand.

Source: MIDF Research - 27 Aug 2019