Tri-Mode System (M) Bhd’s (TRIMODE) expansion of its new headquarter and distribution hub is set to provide earnings impetus to its core business segments alongside additional income source from the new warehouse infrastructure from FY21 onwards. Recommend BUY with a target price of RM0.68 based on 17x FY21 PER, as per the average valuation of Bursa Malaysia Small Cap and Bursa Malaysia Transportation and Logistics Index.

With a track record of over 28 years, TRIMODE is an integrated logistics solutions provider involving services of sea freight, container haulage, air freight, freight forwarding, warehousing and marine insurance. Sales are derived predominantly from Malaysia (90%) with sea freight remains the bread and butter followed by air freight and forwarding with sales contribution of 59%, 31% and 6% respectively in FY19. TRIMODE owns its own fleet of haulage (98 prime moves, 545 trailers & 3 side-loaders) making it one of the top haulage service providers by total volume of container hauled in Port Klang.

Due to the Covid-19 pandemic, there is a shortage of global shipping containers now especially in Asia. The imbalance of supply and demand has worsened the container and vessel capacity in Malaysia causing shipping freight rates to skyrocket by 300% to 400% over the past six months. The higher freight rate is expected to continue until 2H2021 and this is an added advantage to TRIMODE further to its enhanced capacity from the new hub.

TRIMODE’s new 12-acre headquarter and distribution hub in Pulau Indah Industrial Park is expected to be completed by April this year. Upon completion, business operation will be consolidated under one roof including the centralisation of existing haulage operations leading to cost savings and improvement in productivity. The new hub will house a 95,000 sq ft of warehouse built-up space in addition to another 30,000 sq ft which will be added progressively in stages. Warehouse segment will generate a new source of income together with third-party logistics services, providing further cross selling opportunities from existing clients within its value chain.

TRIMODE’s customer base is well diversified comprising of building material, packaging, rubber related products, chemical product, just to name a few. As key clients are multinational companies (eg: Mercedes, Top Glove, Scientex) which generally have higher volume, hence enabling TRIMODE to negotiate better rates from the shipping line thus able to generate higher margins from customers, especially given current shortage of containers capacity.

The group has a formal dividend policy of 30% payout ratio, translating to a projected dividend yield of 2.3% in FY21. Balance sheet profile are manageable at a gearing of 0.3x. We project double digit earnings growth in FY21 driven by its core freight services and additional warehouse capacity in tandem with the recovery in global trade.

Source: Rakuten Research - 8 Feb 2021