1HFY16 core earnings were below our expectation, largely attributable to the underperformance of its contract logistics (CL) division, with warehousing business remaining the main drag. While earnings rebounded sequentially driven by the stronger performance from other divisions, downside risk associated with the turnaround of its warehousing business has yet to subside. Downgrade to NEUTRAL with a revised TP of MYR2.00 (7% upside).

Below expectations. Tasco’s 2QFY16 (Mar) core earnings of MYR7m (+22% QoQ, -13% YoY) were below our expectations, with its 1HFY16 earnings (-29% YoY) accounting for only 39% of our full-year expectation. We attribute the lacklustre performance to weaker contribution from its CL division which saw revenue and PBT falling by 17% YoY and 59% YoY respectively, after being hit by warehousing volume loss from a major customer coupled with high opex cost at its warehouse in PTP, Johor.

Recovery of other divisions. On the bright side, Tasco’s international business solutions (IBS) division staged a remarkable recovery in 1HFY16, with its PBT surging 140% YoY, underpinned by higher export shipments volume and margin expansion due to favourable air freight rates during the period. Losses at the trucking division were also trimmed as a new fast-moving consumer goods (FMCG) distribution business secured in 2QFY16 drove revenue higher.

Forecast revision. Following the lacklustre 1HFY16 results, we lower our FY16F/FY17F/FY18F earnings by 7%/11%/11% respectively due to weaker topline from its contract logistics business coupled the higher cost assumptions attributed to its new warehouse in Johor.

Downgrade to NEUTRAL. While Tasco stands to benefit from a rebound in exports driven by a weaker MYR as shown b y the strong performance of its IBS division, we believe that further earnings upside is currently limited by the speed of recovery of its warehousing business, notably at PTP given its high opex. On this note, we are downgrading our call to NEUTRAL from Buy with a revised TP of MYR2.00 (from MYR2.15 pre-share split), based on unchanged 13x FY16 EPS.