Freight  Management  announced  that  SPAD  plans  to  suspend  its haulage  division  starting  24  Sept.  Maintain  NEUTRAL  pending  further information. Our MYR1.76 FV is based on the industry average of 11.3x FY15F P/E.  Haulage contributed 8% of the group’s FY14 gross profit. In the  worst-case  scenario,  the  suspension  will  drag  its  FY15F/16F  net profit  by  8-10%,  but  we  think  that  Freight  Management  will  likely strategise to mitigate such an impact. 

Possible  suspension  of  haulage  license.  Freight  Management announced  yesterday  that  The  Land  Public  Transport  Commission  or Suruhanjaya  Pengangkutan  Awam  Darat  (SPAD)  plans  to  suspend  its unit's  haulage  license  with  effect  from  Sept  24.  There  are  no  further details about  the possible suspension,  and the board is trying to  contact the relevant officers from SPAD for further information.

Current fleet and earnings contribution.  We understand that Freight Management currently has a fleet of 69 prime movers and 430 trailers. The  haulage  division  has  contributed  around  8%  of  the  group’s  gross profit in FY14. 

The  impact.  Based  on  our  forecasts,  if  the  worst-case  scenario  takes place,  ie  the  haulage  division  is  suspended,  the  impact  to  Freight Management’s  FY15F/FY16F  net  earnings  is  around  8-10%. Nonetheless,  we  think  that  even  if  the  suspension  really  happens,  the division  will  not  run  into  losses  as  Freight  Management  is  still  able  to outsource  the  haulage  services  to  other  party.  While  this  may  reduce earnings  contribution  (compared  with  Freight  Management’s  operating its  own  fleet),  the  division  should  not  be  running  into  losses  or  report zero  contribution.  Freight  Management  will  still  be  focusing  on  itsintegrated logistics business model.   

Maintain NEUTRAL.  As the suspension will take effect two weeks from now,  and  the  management  will  engage  the  authorities  for  further information  in the meantime,  we keep our earnings forecast unchanged at  this  juncture,  pending  more  updates  from  the  authorities  and  the management. Maintain NEUTRAL at a  FV of  MYR1.76, based on 11.3x 

Source: RHB