KEY INVESTMENT HIGHLIGHTS

• Unprecedented 2QFY21 year-on-year growth amidst pandemic

• Soaring revenue from Air Freight and Cold Supply Chain

• PBT increased by +172.0yoy% in 6MFY21

• Elevated air freight rate due to capacity shortage offset the drop in business activity during MCO and subsequent CMCOs, hence improve earnings

• Tasco beneficiary of Investment Tax Allowance

• Maintain BUY with a revised TP of RM2.56 per share

Good performance. Tasco reported a PAT of RM11.4m during its 2QFY21 operating period (+234.0%yoy). This brought its 6MFY21 earnings to RM14.8m (+162.0%yoy), which was in line with consensus estimate at 53% but missed our expectation at 37%. Despite missing our expectations, we deem Tasco’s performance to be stellar and broadly in line of growth prediction. Tasco has shown unprecedented growth amidst the current pandemic operating environment and we expect the group will continue to perform well in 2HFY21 which will in return meet our full-year FY21 earnings estimates. This is premised on the elevated air freight charge which we foresee will remain elevated due to the persistent limited availability of international flights.

Soaring Revenue. The group has shown exemplary top line growth underpinned by its Air Freight Forwarding (AFF) division for its International segment and Cold Supply Chain Logistics (CSC) division for its Domestic segment. AFF saw a revenue of RM117.3m for 6MFY21 (+60.0%yoy) and CSC at RM62.1m (+8.0%yoy). Overall, for 6MFY21 the group recorded revenue at RM408.0m (+10.0%yoy).

…followed by margin expansion. The group’s Profit Before Tax (PBT) stood at RM20.8m (+172.0%yoy) boosted by AFF and CSC divisions. Both divisions have shown more than 2x margin expansions at PBT level. This improvement in operating margin can be attributed to the surge of air freight rates for AFF division and reduction of operating cost for CSC during the second quarter.

Elevated air freight cost to remain in the near future. Confluence of factors provided the tailwind for Tasco excellent performance during the quarter. Primarily, the elevated air freight rates due to air freight capacity shortage allows the group to offset the drop in business activity as evidenced in the division top and bottom line result (+134.0%yoy, +563.0%yoy). Furthermore, as a logistic player, Tasco is designated as essential business and is allowed to operate during MCO and subsequently, the CMCOs which have seen muted impact on the group’s operations at this juncture.

Additionally, the demand for CSC services (most of the division clients are in F&B and pharmaceutical) has shown exemplary resiliency as the demand remains strong. This further cushions and mitigates any effects of general slowdown of business to bare minimum. Point to note, from June onwards, Tasco experienced a surge in business volume, a Vshaped recovery, as business community started to commence operations in earnest after months-long hiatus.

…How FY21E will unfold for DBS segment? Following 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 view this development favourably as CSCL has been the group’s underachiever and has been impacting 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.

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. 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.

Maintain FY21-22F earnings. We remain upbeat on the earnings outlook for Tasco and maintain our 2021/22 forecast.

Target price. We revise our target price to RM2.56 per share (from RM2.23 previously) as we roll forward our valuation base year. Moving forward, we believe the earnings outlook for Tasco remain sustainable. Our target price is derived by pegging our FY22 EPS to a revised forward PE ratio of 11.7x (previously 11.2x) – which is the current mean of B/F 2 years P/E ratio. This translates to an upside of 11.3% from the current price of Tasco.

Maintain Buy. All things considered, we are maintaining our recommendation on Tasco to BUY. 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. Key risks to earnings are: lower than expected saving from Investment Tax Allowance Scheme and sharp drop in air freight forwarding rates due to return of capacity for long haul “belly” cargo space.

Source: MIDF Research - 26 Oct 2020