Freight Management  (FMH)  kick-started  FY14 with  a  commendable net profit of MYR5.3m (+9.7% y-o-y),  which  was  within our and consensus estimates.  All  its  business  divisions  reported  earnings  growth  except the  tugs  &  barges  segment.  The  company’s  expansion  plans  are making  good  progress.  Maintain  BUY  call,  with  FV  revised  upward  to MYR2.00 from MYR1.68.

• Results  in  line.  FMH’s  1QFY14  net  profit  of  MYR5.3m  (+9.7%  y-o-y) was  within our and consensus estimates.  Earnings rose on the back of strong  growth  in  the  sea  freight,  3PL/warehousing,  land  freight  and haulage  segments.  However,  the  escalation  in  staff  cost  and  higher taxation due to normalization of  its  tax rate partially offset the company’s strong topline growth.
• Overview of performance.  Y-o-y, all  of FMH’s  business segments  saw positive  earnings  growth  except  tugs  &  barges,  which  was  affected  by unscheduled  repairs.  The  significant  improvement  in  total  volume handled at the sea freight and land freight segments boosted revenue as well as gross profit margin.
• Expansion plans  make good progress.  The tugs  & barges  to be built via a JV with SES is on track and scheduled to come on stream by 3Q or 4QFY14. Meanwhile,  construction has begun on  FMH’s  new  120k sq ft warehouse,  which  is  expected  to  be  completed  by  end-2014.  On  the regional  expansion  front,  it  has  formed  a  JV  with  Filipino  partners  to expand its integrated logistics business to the Philippines.
• Risks.    These  are:  i)  a  slowdown  in  the  global  and  local  economy,  ii) intensifying competition in the sector,  as well as iii) investment risks in new markets.
• Maintain BUY, FV MYR2.00.   We continue to  like FMH’s solid business model  and  strong  balance  sheet  as  well  as  management’s  asset  light business  strategy.  We have  incorporated  the  company’s  latest  audited figures  and made some slight adjustments. Maintain BUY on FMH,  but upgrade  the stock’s  FV to  MYR2.00 (from MYR1.68),  based  on  a  13.2x (from 11.0x) FY14F P/E, which is the peer average.

1QFY14 Results Highlights

Overall  results  in  line.  FMH  reported  satisfactory  results  for  1QFY14,  with  a  net profit  of  MYR5.3m  (+9.7%  y-o-y),  spurred  by  strong  growth  in  sea  freight, 3PL/warehousing,  land  freight  and  haulage.  However,  increasing  staff  cost  and higher taxation due to normalization of  its  tax rate offset the strong growth in topline. Overall,  as  FMH’s  1QFY14  numbers  met  21%  of  our  full-year  forecast,    we  deem these in line with our and consensus estimates.

Strong growth in sea freight. Sea freight continued to be the group’s main revenue and earnings contributor, accounting for 53.9% and 57.5% of total revenue and gross profit  respectively.  The  segment’s  revenue  and gross  profit  improved  by  9.9%  and 23.6% y-o-y,  mainly due to strong volume growth from both sea freight  less-than-acontainer-load  (LCL)  volume  (+28.7%  y-o-y)  and  full-container-load  (FCL)  volume (+16.5% y-o-y). The strong improvement  also helped to lift its gross profit margin  by 3.3ppts y-o-y.

Land freight  segment chalks up higher volume. FMH’s land freight side remained stable ,  putting  up a strong showing with revenue and gross profit  surging 107.6% yo-y  and  +155.8%  y-o-y  respectively,  mainly  boosted  by  higher  import  and  export volume.  Meanwhile,  import  volume  was  spurred  by  recent  3rd party  logistics  (3PL) contract.

Air  freight  margin  widens.  Although  revenue  dipped  3.8%  y-o-y,  gross  profit improved  by  16.3%  y-o-y,  which  we  believe  was  due  to  higher  volume  achieved, which  then  helped  the  company  reach  higher  economies  of  scale. We  understand that  as  FMH is revamping  the  agency structure  of  its air freight  operation,  we may see some volatility in this division over the next few quarters.

Tugs  &  barges  reports  weak  performance.  For  1QFY14,  the  tugs  &  barges segment  reported  that  revenue  and  gross  profit  fell  17.4%  y-o-y  and  62.4%  y-o-y respectively.  As  guided  by  FMH’s  management,  this  was  mainly  due  to  vessels downtime  arising  from  maintenance  and  unscheduled  repairs  (one  of  its  tug  boats was grounded on the beach due to bad weather). Nonetheless, there were no major losses  and management is still positive on the outlook for this division.  A new set of 
tugs  &  barges  will  be  ready  in  2QFY14  and  accordingly  lift  its  fleet  to  seven sets. Management  also  said  the  tugs  &  barges  to  be  built  with  its  JV  partner,    Scomi Energy Services  (SES, NR),  is on track and expected  to come on stream by 3Q or 4QFY14.

Warehousing  treads  cautiously.  FMH’s  3PL/Warehousing business is growing due to  existing  customers  but  the  profit  margin  dipped  14.4ppts  y-o-y,  mainly  due  to  a less  favorable  product/service  mix.  Construction  has  started  on  its  120k  sq  ft  new warehouse in Klang adjacent to  the  existing one and  scheduled to complete by  the last quarter  of  CY2014 (2QFY15).  FMH  is  sticking  to its asset light business model and does  not want to over-expand the warehousing business. It would  also continue to package its 3PL/warehousing business as a total service package to its customers.

How  other  operating  divisions  fared.  The  performance  of  FMH’s  other  divisions wee mixed, but this will not severely affect the Group. Although rail freight remained profitable,  its  contribution  was  insignificant  and  management  may  take  a  relook  at this  business  model.  That  said,  any  decision  to  cease  operation  will  not  make  a material negative impact on the Group. Meanwhile,  the  customs brokerage  segment was profitable, but its contributions are insignificant as it continues to provide support to  FMH’s  clients.  Lastly,  the haulage  division  also  remains  profitable and  brings  in stable margins.

Making good  progress  in  venture  to  Philippines.  FMH  had  recently  expanded into  the  Philippines  by  forming  a  50:50  JV  company  with  Filipino  parties  that  will provide point to point integrated logistics services to and from the Philippines. It also entered  into  a  business  sale  agreement  to procure  USD350k,  business  intellectual property,  goodwill,  business  records  and  the  transfer of  employees  to  kickstart the Philippine subsidiary.

Updating model  and lifting  FV.  We have updated FMH’s latest audited financials into  our  valuation  model  and  increased  our  earnings  forecast s  slightly  to MYR25m/MYR30m from MYR24.8m/MYR29.8m. as FMH is confident that the  group would chalk up 10-15% y-o-y growth in FY14 on the back of improving fundamentals, we believe it will meet our full-year forecast. We also lifted our valuation parameter to 13.2x FY14 P/E (from 11.0x),  which is in line with the industry average.  This  bumps up our FV to MYR2.00 (from MYR1.68). Maintain BUY.

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Freight Management is an integrated logistics provider

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Source: RHB