KEY INVESTMENT HIGHLIGHTS

• Frontloading trends may weaken ocean freight demand ahead
• New client contributions to strengthen domestic business
• Expansion plans to leverage new tax allowance for SLC
• Downward revision of earnings by -12% to -15%
• Maintain BUY with a revised TP of RM1.00

Tasco Berhad (Tasco) recently held its results briefing. Here are the key takeaways:

International business solutions. Air freight rates for major routes from Malaysia have only slightly increased as we enter 4QCY24 (3QFY25) and are expected to remain stable due to limited belly cargo space and steady demand. Meanwhile, ocean freight rates are expected to be on a downtrend due to weaker global demand despite shipping lines' efforts to increase rates through blank sailings. This weaker demand is attributed to heavy frontloading for the holiday season in 3QCY24 (2QFY25) prior to a 3-day strike by dockworkers on the East and Gulf coast of the U.S. in Oct-24.

Domestic business solutions. Several subsegments of the domestic business faced weak performance due to lost volume from a major China- based solar module manufacturer that halted operations in mid-2QFY25 because of U.S. sanctions. We may only see a gradual recovery in recovery in volume for this division, as new customers, including a major automotive customer, are expected to progressively fill the gap.

Meanwhile, West Port Logistics Centre (WPLC) Block A has reached full occupancy, with a new US-based medical technology customer securing almost 50% of the space. The financial impact of this tenant is expected to start in 3QFY25.

Budget 2025. Most of Tasco's foreign workers (47% of the workforce) will have their minimum wage raised to RM1,700 from RM1,500 by Aug 25. The exact increase depends on the hours worked, and customers have been notified that it will be passed on to them. Moreover, its expansion decisions will now consider the recently announced tax incentive for the Smart Logistics Complex (SLC). The new incentive resembles the investment tax allowance that Tasco benefits until Jul-26, minus the minimum capital expenditure requirement, and it also applies to SLC operators leasing smart warehouses for a minimum of 10 years.

Requirements include a minimum area of 323,000 sq ft and the integration of at least 3 Fourth Industrial Revolution (IR4.0) elements, amongst others.

Maintain BUY. Taking all factors into account, we revised our earnings estimates for FY25E/FY26F by -15%/-12% respectively to reflect lower rates and volumes in the ocean freight segment, a lower average warehouse utilisation rate, and a slight increase in operating expenses.

As a result, our target price is revised lower to RM1.00 (from RM1.20) as we roll over our valuation base year. The stock is trading at 9.8x FY26F EPS, which is about -1SD of its 5-year historical mean.

Source: MIDF Research - 5 Nov 2024