KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised PAT dipped by -26.4%yoy

• Revenue growth in express delivery segment offset by strong competition higher investment in regional and overall infrastructure

• Losses for logistics services widened due to higher maintenance cost

• Nevertheless, PT SAP Express contributed to the share of profit from associates

• Earnings estimates revised downwards

• Maintain NEUTRAL with an revised TP of RM0.27 per share

1QFY20 results below estimates. GD Express Carrier Berhad’s (GDEX) 1QFY20 normalised net profit dipped by -26.4%yoy to RM4.8m. This was below ours and consensus’ expectations, accounting for 15% and 17% of respective full year forecasts. The main reason for the negative deviation was the higher capital investment incurred for its regional expansion and information technology (IT) enhancement. This led to the nearly +20%yoy increase in overall operating expenses.

Express delivery revenue growth offset by higher opex. In 1QFY20, the express delivery business had a decent revenue growth of +9.5%yoy amidst demand from B2B and B2C business. We view that the some support came from e-commerce demand boosted by special sales event such as the “9.9 sales” which saw year-on-year sales volume tripling. However, PBT growth of the segment went down by -12.0%yoy due to deterioration in revenue yield as a result of intense price competition and also higher investment in human capital to firm up its regional expansion and overall infrastructure. As such, PBT margins of the express delivery segment in FY19 declined by -2.7ppts to 11.1% 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 114 as of October 2019.

Logistics services remains subdued. On the contrary, losses before tax for the logistics business widened to –RM1.6m in 1QFY20. The lacklustre performance was partly attributable 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. These 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.

Performance of overseas associate. During the same period, GDEX’s associate in Indonesia, PT SAP Express recorded a quarterly net profit of IDR5.1b (or approximately RM1.5m) due to higher revenues secured through sizeable contracts. This translates to RM0.7m net profit attributable to GDEX, after taking into account of its 44.5% stake in PT SAP Express. We also gathered from the management that GDEX’s other associates; Webbytes has also recorded profit. We expect the share of profit from Webbytes to improve due to its RM36m contract by Malaysia Airports Holdings Berhad (BUY; TP:RM9.43) to supply point-of-sale systems (POS) at its seven airports from CY20 to CY24. This signifies GDEX’s investment is coming to fruition.

Earnings estimates. We are revising our earnings estimates for FY20 and FY21 to RM25.3m and RM28.8m from RM33.0m and RM35.1m respectively. This is to take into account of the higher operating expenses incurred from its regional plans and IT enhancement which we believe to persist throughout the year.

Target price. We are revising out target price to RM0.27 per share (previously RM0.30 per share) based on DCF valuation (terminal growth: 3.0%, WACC: 12.0%) as we roll forward our valuation base forward to FY21 and adjust our earnings downwards due to abovementioned reasons.

Maintain NEUTRAL. GDEX’s healthy balance sheet has supported the group’s various expansion plans. This includes acquisition of a 44.5% stake in PT SAP Express, and efforts to secure a stake in a Vietnamese company before the end of CY2019. Nonetheless, we view that the earnings accretion from ventures especially in Vietnam has yet to be meaningful as it will undergo a gestation period in addition to the intense competition within the industry. Meanwhile, valuation remains stretched at a 12-month trailing price-to-earnings ratio of 50.2x compared to the average industry of approximately between 15.0 to 20.0x. 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 - 19 Nov 2019