• Still BUY, new MYR0.90 TP (DCF) from MYR1.01, 55% upside and c.6% yield. 9MFY23 (Jun) core earnings met our expectation at 78% despite a seasonally weaker quarter due to FM Global Logistics’ fast-growing domestic 3PL business. We lower our FY23F-24F earnings by 9% and 6% to account for the expected weaker freight environment ahead. After accounting for such weakness, the current valuation stays undemanding, trading at only 6.6x FY24F forward P/E, well below peers’ 11.8x. The group also declared a second interim dividend of 1 sen/share.

• Met expectations. 3QFY23’s revenue came in at MYR202m (-37.7% QoQ, -17.7% YoY), dragged by weaker contributions from the international business segment due to lower freight rates and slower global economic activities. Core profit for the quarter was down 9.1% QoQ (-23.9% YoY) as expected, since 3Q is seasonally FM’s weakest quarter – the sharper YoY drop was attributed to 3QFY22’s high base given pent-up post-lockdown activities. Despite a much-weaker freight operation, 9MFY23 bottomline was partially cushioned by its domestic 3PL business, which booked a commendable YoY growth of 54.2% on a strong customer base, reduction in outsourced activities, and higher distribution volumes. The business-to-business last-mile segment also turned profitable after FM ceased its loss-making retail operations.

• Resilient 3PL logistics cushioned freight market softness. While freight forwarding remains FM’s core business, the outlook within this area still remains challenging – no thanks to the rise in ocean capacity, port congestion easing, and slow trade activities. The group recently purchased 7.5-8 acres of land and a c.200k sq ft single-storey warehouse (slated to go operational in CY24-25). In turn, we think this will boost contributions from its 3PL segment, as warehouse and logistics solutions demand remains high. RHB’s economists have reiterated their core view of a 2H23 trade recovery with Malaysia’s GDP forecast growth at 5% YoY, given that the country’s economy is showing signs of bottoming out. In its latest Apr 2023 projections, the World Trade Organisation also raised its 2023 trade volume growth estimate to 1.7% from 1% previously – supported by China’s re-opening.

• Earnings revision. Although results were in line, we lower our FY23F-24F earnings by 9% and 6% to account for a much weaker freight environment ahead. Our DCF-derived TP is now MYR0.91 after rolling over our valuation to FY24. The current valuation is undemanding, trading at 6.6x FY24F forward P/E, well-below its historical mean and regional peers. Key risks include slower-than-expected volumes within the sea and air freight wings, higher- than-expected opex, and a slowdown in global trade activities.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 25 May 2023