KEY INVESTMENT HIGHLIGHTS

• IBS to remain boosted by elevated air freight rates - to be sustained by capacity shortage

• Recovering DBS on the back of CSCL outperformance to cushion impact on earnings

• PAT to be uplift via Incentive Tax Allowance (ITA)

• FY21E-22F earnings lifted near 2.5x from previous forecast

• Upgrade to Buy with revised TP of RM2.23 per share

IBS to remain boosted by elevated air freight rates. Recall that, Tasco’s Air Freight Forwarding (AFF) segment saw increased PBT to RM3.4m compared to RM1.2m in 1Q21. Strength in the IBS came from soaring airfreight rates due to reduced supply of capacity as businesses rushed to clear backlog shipments from sea transportation to air mode. The positive PBT was supported by higher revenue during the quarter of RM54.7m, (+51.8%yoy). Hence, we reiterate our view that the IBS segment will remain boosted by the elevated air freight rates given the persistent capacity shortage brought upon by among others; the unprecedented grounding of passenger flights due to the novel coronavirus (Covid-19).

Air freight is capacity driven market. At this juncture, we are on the view that spot air freight rates will remain at elevated level, albeit with a slight dip from the peak rates. This is due to persistent capacity shortage in the segment (refer to Chart 1). Among others, the shortage is driven by soaring demands due to ocean freight blanked sailings and reduced passenger freighter capacity. Note that, passenger freighter or “belly cargo space” for long haul flights make up more than 50% of available cargo capacity pre-pandemic which was now crippled as border controls and safety measures are enforced on many parts of the world. According to International Air Transport Association (“IATA”), belly capacity for international air cargo was -67.0% below the levels of August 2019, owing to the withdrawal of passenger carrier services due the COVID-19 pandemic. Zooming back on company level, we also believe the heighten prospect on top line improvement of IBS division will cushion and alleviate any shortfall of other segments for Tasco due to disruptions of business.

Recovering DBS to cushion impact on earnings. We anticipate that the DBS segment’s recovery will be underpinned by strong performance from Cold Supply Chain Logistics (“CSCL”). This is after the DBS segment saw poor financial result last quarter as the group was impacted by the temporary closure of businesses and production activities attributable to the enforcement of the movement control order (“MCO”). Recall that, recent quarter result shown that Contract Logistics and Trucking segments recorded decline in PBT at RM2.7m and - RM1.6m, -50.2%yoy and -2.7%yoy on the back of decline in revenue to the tune of RM60.2m (-16.7%yoy) and RM10.6m (-42.8%yoy).

Fortunately, CSCL division cushioned the earnings erosion from other two segments with a positive result derived from its new grocery store and dairy product customers. Revenue increased by 17.6% and more than doubled its PBT at RM2.9m for the quarter.

…How FY21E will unfold for DBS segment? Based on our meeting with the Management, we believe that there might be pockets of weaknesses in terms of business performance for certain segment in DBS; namely Haulage, Trucking and Warehousing. This is due to consequential impact of MCO that hinder the full earnings potential for the said segments for FY21E. Recovery is only to the extent of gaining back the lost ground, financially, but may be insufficient to fill the financial gap for the lost earnings. That said, our expectation is that the strong performance of its CSCL will put a cork on the earnings erosion from other underperforming DBS segments and mitigate its impact on the group overall performance. We looked upon this development favourably as CSCL had been the group’s underachiever and jeopardized the overall earnings since its acquisition. The division found a second wind from MCO as its operations has now broken even and poised for upwards trajectory for its financial earnings. Point to note, CSCL is currently the largest cold chain provider in Malaysia with estimated ~35% market share of the segment with key customers consists of FMCG retailers, F&B players and pharmaceutical groups (refer to Chart 2).

Tasco is a beneficiary of ITA. Under the Integrated Logistics Services scheme, Tasco will be able to enjoy income tax exemption via Investment Tax Allowance (“ITA”) of 60% on its qualifying CAPEX incurred within five years. This can be offset against 70% of statutory income for each year of the tax relief period. Furthermore, one of the terms in the Approval Letter stipulated that Tasco shall make capital expenditures related to logistics to the tune of at least RM240.0m for a period of five years.

…more details on the tax incentive. Based on the guideline from MIDA, to qualify for the exemption, among others, Tasco must: (i) increase fixed asset investments of at least 50% on top of existing fixed asset investments related to logistics or; (ii) increase fixed asset investments of 30% on top of existing assets depending on the company capex investment allocation. The asset size and required capex investment of RM240.0m is in line with the terms stipulated by in the Approval Letter and the guideline from MIDA. To note, as of 1Q20, Tasco’s total long-term assets stood at RM596.8m with PPE as the biggest portion at ~83%, or RM497.0m.

PAT uplift from tax exemption. Management is sanguine on the prospects of tax saving from the exemption. Based on their guidance, there will potential lift of circa RM10-12.0m at PAT level, each year of the assessment period on the back of estimated capex of RM400.0-500.0m for the whole period. The bulk of spending is earmarked for warehouse expansion in Shah Alam which fits the criteria of ‘qualifying CAPEX, set by MIDA. This estimation on tax savings was derived by multiplying the potential CAPEX spending to 60% to arrive on the amount eligible tax allowance on its qualifying CAPEX. Subsequently, we arrived to the potential tax savings by multiplying the amount with corporate tax rate at 24% and divided the result with each year of assessment with additional years of potential carry forward.

FY20-21F earnings lifted by >100%. We are upbeat on the earnings outlook for Tasco, hence we are revising our PAT projection substantially to RM39.8m/43.8m for FY21E/FY22F from RM17.6m/19.5m respectively previously. This translates to a jump of 2.26x/2.24x from our previous forecast which can be attributed to higher top line of +2.34% from our previous forecast and substantial boost at bottom line level from the tax exemption as delineated above.

Target price. Taking all into consideration, we are revising our target price to RM2.23 (from RM1.32 previously). Our target price is derived by pegging our FY21 EPS to a revised forward PE ratio of 11.2x – which is the mean of B/F 2 years P/E ratio. This translates to an upside of 60.04% of the current price of Tasco.

Upgrade to Buy with an upside of 60.04%. All things considered, we are upgrading our recommendation on Tasco to BUY (from Neutral previously). We opine that the upgrade is timely for the group given the confluence of factors have improved the fundamental outlook of Tasco amidst challenging operating environment. Moving forward, Tasco will see improved earnings on the back of (i) growing top line for International Business Solutions (“IBS”), (ii) brisk recovery on Domestic Business Solution segment (“DBS”), and (iii) margin expansion via Investment Tax Allowance scheme from MIDA.

If the Covid-19 outbreak remains persistent, we anticipate that both demand and supply side of the economy will witness protracted weakness and demand will take longer to recover to pre-Covid levels. If that the case, it will be an opportune time for Tasco to capitalize on elevated air freight rates which significantly cushion business downturn in other parts of its divisions. Furthermore, we believe that Tasco’s growth prospect lays in its cold chain logistics assets which are a clear competitive advantage to other logistic players. Majority of its peers are focusing on either poor margin business such as express delivery (which is currently saturated, especially with new entrants) or traditional core logistics services such as trucking and conventional warehousing. To cap it all, even with the undemanding valuation at mean level (B/F PE 2 years), Tasco’s current share price offers a strong upside 60.04%. All things considered, we are upgrading our call to BUY.

Source: MIDF Research - 1 Oct 2020