We initiate coverage on GDEX with a BUY call and DCF-derived MYR2.42 TP (a 20.4% upside), valuing the stock at an implied 81x FY15F P/E. It has seen 10 years of strong earnings growth, which is expected to remain resilient in the coming years on the capacity expansion of its express delivery service and logistics arm as the drivers. Opportunity in the AEC is a key catalyst to drive GDEX’s earnings higher. 

About GD Express Courier (GDEX). GDEX is a leading express delivery service provider in Malaysia that is growing strongly. It is currently expanding aggressively on the back of increased business volume and is embarking into the logistics solutions segment. FY15 (Jun) is an investment year for GDEX and we opine that the company is poised for stronger growth in FY16 and FY17. 

Strong earnings growth track record. GDEX has posted 5-year revenue and net profit CAGRs of 18% and 39% respectively, with steady improvement in its operating margins. Growing its business through quality deliveries, prudent cost management and high staff productivity are the key competitive components to the company’s success. 

Growth potential. GDEX has more room to grow, as it believes that ecommerce has changed the way business is done and that it is in the sweet spot to ride on this bandwagon. Street thinks improvements in regional internet infrastructure will facilitate transaction volumes and allow the company to grow its business. Note that GDEX not only focuses on Malaysia’s 30m population, but the ASEAN region’s 600m inhabitants as well. We believe this gives it huge growth potential.

Risks. The industry is very competiitve and pricing power has not been great. Any economic slowdown may result in lower business volumes, which should directly impact GDEX’s profitability.

Initiate at BUY with a MYR2.42 TP. We derived our MYR2.42 TP using a 5-year DCF on its free cash flow to firm (FCFF) with a WACC of 6.6% and a 3% terminal growth rate. With a 20.4% upside from its last closingprice, we initiate coverage on GDEX with a BUY call. The stock may be trading at very high P/E valuations, but we believe its high potential growth could justify the high valuations.

Investment Case And Valuation 

Quick snapshot about GDEX.GDEX group was established in 1996, but ran into difficulties triggered by the 1997 Asian financial crisis. In 2000, Mr Teong Teck Lean entered as a controlling shareholder and, together with Mr Leong Chee Tong, they embarked on the restructuring and turning around of the company. GDEX obtained ISO 9001:2000 certification in 2003, becoming the first local express delivery company to be awarded this standard. GDEX was then listed on the ACE Market of Bursa Malaysia in 2005. It was also the first local express delivery company to deploy conveyor systems for both parcel and document sorting in 2008. 2011 marked another significant milestone for GDEX when Singapore Post (SPOST SP, NR) emerged as a substantial shareholder. The company then started a new chapter in 2013 when it was successfully transferred to Bursa Malaysia’s Main Market.

Earnings growth on steady trend. GDEX has reported steady revenue and earnings growth over the past five years. It has a 5-year revenue CAGR of 18%, a 5-year EBITDA CAGR of 35.5% and a 5-year core net profit 5-year CAGR of 38.9%. Management believes, and we concur, that FY15 will be a consolidation year, whereby the company will invest and expand for more exponential growth in the subsequent two financial years. Hence, we forecast for its FY16 and FY17 earnings to grow organically by 26% and 28% respectively. We understand that GDEX is also eyeing other inorganic opportunities, ie M&As, to expedite this growth. Economies of scale. 10 years ago, GDEX operated on a very small scale with a fleet of only 90 trucks and vans. As at September, the company has grown the fleet to a total of 495 units, and this number is still growing. A decade ago, staff strength stood at 489. Now, it has almost 2,300 staff working for the company. Through years of prudent management, expansion and enhancement of staff productivity, GDEX has grown its scale while, at the same time, brought down its cost per unit. This is evidenced by its continuous growth in profit margins. Its EBITDA margins have also grown, to 29.9% in FY14 from 17.2% in FY10.

Expansion opportunities. GDEX’s expansion opportunities are huge. The company started its restructuring process in 2013 and switched its focus towards a broader market beyond Malaysia, ie ASEAN. Malaysia has a population of 30m, but in order to escalate its growth to a new high, GDEX needs to expand its footprint by tapping into the region’s  600m inhabitants. The establishment of the ASEAN Economic Community (AEC), with the goal of integrating the region’s economy by 2015, may be an opportunity for GDEX’s next quantum leap, ie to grow with the integration of ASEAN’s markets. The AEC envisages the following key characteristics: i) a single market and production base, ii) a highly competitive economic region, iii) a region of equitable economic development, and iv) a region fully integrated into the global economy.

DCF-based TP of MYR2.42. We derive our MYR2.42 TP using 5-year DCF valuation, with a weighted average cost of capital (WACC) of 6.6% and terminal growth rate of 3%. With a 20.4% upside from its last closing price, we initiate coverage on GDEX with a BUY call. We believe its superior margin vs its closest express delivery peer – Nationwide Express Courier (NAT MK, NR) – as well as potential collaboration withSingapore Post and Alibaba (BABA US, NR) could possibly propel its earnings to a higher level.

Assumptions And Forecasts 

FY15 is an investment year. We understand from management that FY15 will be a consolidation year and that GDEX is investing for greater future growth. Hence, we do not expect any strong growth in earnings in FY15. However, we think that FY16 and FY17 net profit growth will be interesting after the company’s investments are done. Hence, we advise for investors to look into its longer-term outlook.

Topline growth assumptions. We understand that GDEX is currently capable of  grow its customer base. GDEX is aiming to achieve a target of 100,000 packages per day to boost its earnings base in the next two to three financial years. Conservatively, we imputed a volume growth of 10-15% YoY for FY15-16. Pricing for its packages vary according to size and type of material. We used an average price of MYR10 per package and assume that the forward pricing will be hovering around MYR10-11 due to industry’s intense competition. Together with a conservative growth of MYR1m-1.5m per annum for its logistics arm, we derive a topline growth of 15% (FY16) and 14% (FY17).

Cost structure. Labour costs are one of the main operating expenses for GDEX. Extensive manpower is required for packaging, tracking, invoicing, customer service/helpline and deliveries. Hence, productivity is the key to improving its profit margins. With that in mind, the company implemented an incentivised system to promote workforce productivity. As opposed to a unionised system, workers are compensated with the amount of work done, ie the more they work, the higher their earnings. GDEX currently has a workforce of about 2,300 and we assume that, with the volume growth expected, the company may need to add additional 100-200 workers per annum. Also, we have imputed a higher diesel expenditure for its transportation costs, anticipating that the Malaysian Government will eventually remove fuel subsidies.

EBITDA margin. We are confident that GDEX will be able to keep its EBITDA margins in the healthy 20-25% region via its prudent cost management, and high productivity and efficiencies. The company also has its own workshop that undertakes the maintenance work for its fleet. This helps to ensure that the fleet’s performance is at an optimal level. This, in turn, will help GDEX to maintain its fleets’ fuel consumption at efficient levels.

Minimal financial burden. GDEX has already achieved a net cash position as at FY14. We believe that the company will keep its solid balance sheet in net cash territory for the foreseeable future, given management’s intention to not gear up. Tis serves as strong spport for GDEX, given that it can expand regionally and into new businesses without having to contend with any heavy financial burdens.

Investment Risks

Intense competition. Although GDEX has been growing steadily over the years and is aiming to expand further into the region, the main downside risk for the company would be the pricing power of its services. As highlighted earlier, the express delivery/logistics services segments are very fragmented in Malaysia and there are a lot of players are competing in the industry. A drop in the ASP of GDEX’s products will affect the earnings directly. We believe that a 1% drop in selling price will mean a roughly 4% drop in its overall earnings.

Largely affected by the global economy. A global economic slowdown could possibly slow down business transaction volumes and impact GDEX’s growth. Nonetheless, the company underwent tough times in the 2008-2009 global recession and was still able to report profit growth, showcasing its quality management. High growth rate assumptions. We are forecasting for a quantum leap growth for GDEX in FY16-17. Any slowdown in the economy, or delays in the formation of the AEC (as well as any execution risks), could possibly impact the company’s earnings growth.

Financial Overview 
5-year revenue growth CAGR of 18%. GDEX has been able to report such a strong revenue growth mainly due to heightened demand in the industry and its own fleet expansion. The company has a fleet size of 495 trucks and vans as at September from only 90 units 10 years ago. Staff strength has also increased to 2,300 as at 30 Jun from 489 a decade ago.

5-year net profit CAGR of 38.9%. Strong revenue growth coupled with prudent cost management has fuelled GDEX’s growth. This allowed the company to report such a promising net profit growth level.

Profit margins are also growing YoY. It is also worth highlighting that the growth in GDEX’s earnings margins is impressive. This was mainly due to its economies of scale, ie a large fleet size, and also prudent cost management. Staff productivity and efficiency are the keys to the company’s success story.

Source: RHB