• Still BUY, new MYR1.86 TP from MYR1.75, 82% upside and 4% yield. We came away from a post-results conference call feeling upbeat about TASCO’s performance in the coming quarters. 9MFY23 (Mar) performance surprised Street and yet again speaks volumes for the operational excellence and management’s strategy. We expect earnings to continue being supported by initiatives in business wins, integrated logistics solutions tax incentive booster, a diversified clientele, and positive GDP outlook.

• Key takeaways. In view of the freight rate normalisation, TASCO has considered locking in ocean freight rates for 1HCY23, which acts as a confidence boost amidst global uncertainties. Despite the 3QFY23 net profit blip on an unrealised FX loss, our analysis indicates that 4QFY23 earnings should see better numbers amid a stabilising FX rate. The much-anticipated 4-storey Shah Alam Logistics Centre is still keeping up with its progress, with a handover slated for Jan 2024.

• Freight rates are less of a concern, the global recession is. After comparing ocean and air freight rate indices to TASCO’s group PBT on a quarterly basis (Figures 1 and 2), we see that concerns over drops in freight rates are overdone. While freight rates do impact bottomline, we reckon the PBT drop magnitude is less drastic when compared to the fall in freight rates. This was partially mitigated by the ramp-up in volumes due to the affordability and attractiveness of ocean freight rates. We also think juggling between air and ocean shipments, as well as TASCO’s strength in the contract logistics (CL) segment, will continue to sustain overall profitability.

• Outlook. Management believes the global recession should be the pressing problem for the group and logistics industry as a whole. Nevertheless, our house remains bullish in terms of US and global growth, which will show signs of recovery by the summer of 2023. For 2023, our GDP growth forecast in the US is 2% while the International Monetary Fund projects a 2.9% global growth. Even so, management shared its strategy to reduce third-party outsourcing for the CL segment while maintaining high utilisation of its own assets should a global recession happen. Moving forward, diversified services and clientele will still remain the key play for TASCO along with its strong international presence. We continue to look forward to the group delivering commendable sustainable performances, defying investor expectations of an earnings contraction.

• Valuation. We keep our earnings estimates unchanged, but raise TP to MYR1.86 as we roll-over our valuation year to FY24F, inclusive of a 2% ESG premium to our intrinsic value – pegged to an unchanged 15x P/E, which is in line with its historical mean. The below-peer 8.2x valuation presents a compelling investment proposition into Malaysia’s leading integrated logistics player with consistent earnings delivery. A potential final dividend of c.3.5 sen/share can be expected, assuming a 30% payout ratio.

• Key risks to our call include weaker-than-expected volumes recovery, loss of key customers, and higher-than-expected opex.

Source: RHB Research - 8 Feb 2023