KEY INVESTMENT HIGHLIGHTS

• 2QFY24 core PATAMI missed our expectation
• Freight volume decline may have affected demand for other logistics services
• Cessation of oil logistics operations during the reporting quarter
• Downward revision of earnings between -14% to -41%
• Downgrade to SELL with a revised TP of RM0.25

Below expectations. CJ Century Logistics Berhad (CJ Century) reported a core PATAMI of RM1.0m for 2QFY24, resulting in a 6MFY24 core PATAMI of RM3.1m. This figure amounts to only 25% of our full- year estimates. Although revenue matched our projections, the shortfall was attributed to reduced margins.

Quarterly. Revenue from total logistics (-9.0%qoq, -17.7%yoy) decreased due to a reduced business volume contribution from its freight forwarding customers, which also impacted other logistics services. The Group reported that its high-margin oil logistics division, which involved the operations of 2 floating storage units near Port of Tanjung Pelepas (PTP) in Johor, ceased during the reporting quarter. This led to an operating loss of -RM0.6m for this division. The procurement logistics division also underperformed due to decreased export activities of the home & electrical appliances, leading to a revenue decline (-21.3%qoq, -4.8%yoy). As a result, core PATAMI (-42.4%qoq, -70.5%yoy) fell significantly due to diseconomies of scale.

Outlook. The weakness in the freight forwarding segment is likely due to a reduction in shipment volume from its South Korean-based customers, who collectively account for 30% to 35% of the revenue. A notable customer, CJ Bio, is reportedly a major contributor to the decline, as it faced increased competition from Chinese suppliers. This ongoing reduction could continue to negatively impact demand for the related logistics services. We are increasingly concerned about inefficiencies resulting from diseconomies of scale, which could persistently exert downward pressures on profit margins.

Downgrade to SELL. We have revised our earnings forecasts for FY24E/FY25F/FY26F downward by -41%/-15%/-14% respectively, to reflect anticipated lower margins. Accordingly, we have adjusted our target price from RM0.30 to RM0.25 (based on 12x FY25F) and downgraded our recommendation from NEUTRAL to SELL. The stock is currently trading at 14.3x FY25F or in line with its 5-year historical mean. A key driver for earnings improvements would be a quicker rebound in shipment volume.

Source: MIDF Research - 23 Aug 2024