• BUY, new MYR1.75 TP from MYR2.03, 106% upside, c.4% yield. TASCO’s results beat Street’s estimates, thanks to its robust international business solutions (IBS) segment which was supported by higher volumes despite downtrending freight rates. We believe the stickiness of its diverse clientele and solid business fundamentals will sustain its strong earnings performance, with a boost from the integrated logistics solutions (ILS) tax incentive. The stock’s below-peer valuation of 7x presents a compelling investment proposition into the country’s leading integrated logistics player.

• Beating consensus’ expectations. TASCO reported 2QFY23 earnings of MYR24.1m (-1.2% QoQ, +53.8% YoY), bringing the 1HFY23 figure to MYR48.6m. At 52% of our full-year estimates and 61% of Street’s, results are deemed to be in line with our expectations, but beat consensus’.

• Strong IBS segment dragged by haulage segment. 1HFY23 PBT for air and ocean freight forwarding grew by 52.3% YoY and 189.4% YoY on a continuous pick-up in business activities and newly secured customers following the sustained economic reopening, despite the downtrend in freight rates. 1HFY23 PBT for the contract logistics (CL) division was flattish YoY, down -3.2%, dragged by the customer clearance business which saw lower volumes during the period, cost escalation for labour, and higher depreciation costs for the newly added fleet. Notably, the significant drop in 1HFY23 PBT for the haulage business was attributed to the reduction in delivery of containers for a key customer.

• Sustainable outlook. We believe Tasco’s underperformance YTD is due to the expectation of an earnings downtrend, given the normalisation in freight rates. While we maintain cognisance of the economic slowdown, we believe the positive total trade and GDP outlook locally should result in positive throughput volume growth in the near term. Contrary to the general perception, although freight rates have been on a downtrend since early this year (and unlikely to return to pre-pandemic levels), the higher volumes have helped sustain the performance, given the relatively attractive ocean freight. Organic growth and new customer acquisitions are expected to continue, with a boost from its diversification efforts and cost pass-through exercise. We look forward to the 620k sqft Shah Alam Logistics Centre expansion, which would allow TASCO to capture the warehouse shortage opportunity at superior yield (low land cost) in 1HCY24.

• Still BUY. Despite 1HFY23 numbers looking to be slightly ahead of our full- year forecasts, we keep our earnings forecasts at this juncture, in view of the uncertainties within the operating environment and potential slowdown of the global economy. Our TP, which incorporates a 2% ESG premium, is pegged to a lower 15x (from 17x) FY23F P/E (in line with its mean) in view of the above reasons, and increasing bond yield environment. Key risks: Weaker-than-expected volume recovery and higher-than-expected opex.

Source: RHB Research - 28 Oct 2022