KEY INVESTMENT HIGHLIGHTS

• Proposed issuance of up to 705.2m warrants
• Potentially generate between RM281.7m-282.1m of additional funds for GDEX
• We are leaving our earnings estimates unchanged for FY21F and FY22F
• We have not yet imputed the possible earnings dilution due to preliminary stage and long gestation period
• Maintain target price at RM0.34 per share

Proposed Warrants Issuance. Based on yesterday announcement, GD Express Carrier Berhad’s (GDEX) has proposed issuance of up to 705.2m free warrants in the company. This is on the basis of one Warrant C for every eight existing shares in GDEX (1:8). Furthermore, according to the announcement, the Warrants C will be issued in registered form and constituted to be executed by the GDEX will have a tenure of seven years. Timing for entitlement date is to be determined and announced later. Refer Table 1 for more indicative details of the proposed warrant issuance.

Rationales for the issuance. Management has disclosed several rationales for the proposed issuance; (i) as a form of reward for existing shareholders (warrants are issued at no cost to shareholders), (ii) opportunity for existing shareholders to increase their equity participation, and (iii) strengthen the capital base of the GDEX and enable the group to raise additional funds for working capital requirements.

Raising money. This proposed exercise potentially generate between RM281.7m-RM282.1m of additional funds for GDEX to serve its working capital requirements (administrative and operational expenses, payment to suppliers and other creditors). Assuming full exercise of the warrants, we can arrive to the amount by multiplying new shares issued, with indicative exercise price of RM0.40 per share. The amount is estimated by taking into accounts two possible scenarios (Refer Table 2).

Raising money. As of 4Q20, the group cash and equivalent stood at circa RM267.68m (including deposits and short term funds) whereas GDEX total borrowings is to the tune of RM30.48m (majority portion is hire purchase payables). Quick peer analysis using Bloomberg indicates that GDEX ratio of total debt to total equity is lower than average, a positive for the company, at 21.68% vs. average peers at 52.68%.

Earnings estimates. We are leaving our earnings estimates unchanged for FY21F and FY22F as we opine that GDEX will be able to meet our earnings projections as the industry’s prospect remains positive in the foreseeable future.

Target price. We are maintaining our target price at RM0.34 per share based on DCF valuation. We have not yet imputed the possible earnings dilution by taking into account the prospect of enlarged share capital base. This is due to the preliminary stage of the proposed issuance and given that the indicative tenure of the warrants is seven years. We will update our estimates, pending more material development from the company.

Maintain NEUTRAL. GDEX’s lean balance sheet with a net cash position of above RM100m has supported the group’s various expansion plans. This includes the acquisition of a 44.5% stake in PT SAP Express, and the acquisition of 55.0% stake in a Vietnamese company. Domestically, GDEX is still strategically evaluating the business model for an automated sorting hub in Petaling Jaya to fit the new norm. Meanwhile, valuation remains stretched at a 12-month trailing price-toearnings ratio of 115.74 compared to the average industry of approximately 42.77x. We believe that other non-listed players such as Ninja Van and J&T will remain as a threat in the next two to three years as these companies continue to receive funding. 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, (ii) increased adaption of offline businesses to GDEX’s online platforms; and (iii) permanent enforcement of social distancing measures which will limit footfall at brick and mortar businesses.

Source: MIDF Research - 22 Oct 2020