• Maintained BUY, MYR1.70 TP, 104% upside with c.4% yield. As we anticipated, TASCO began the year on a soft ground, with earnings in 1QFY24 (Mar) at MYR14.2m (-41.8% YoY), amid an industry-wide lower throughput volumes and freight rates. We expect better quarters ahead buoyed by volumes recovery, new warehouses, and a lower effective tax rate. We continue to like TASCO for its diversified clients that sustain its earnings base owing to its diversifying strategies, and the integrated logistics solution tax incentives which offer a buffer against sector headwinds.

• A seasonally weaker quarter with core earnings in 1QFY24 of MYR14.2m (-34.8% QoQ, -41.8% YoY) making only 15% and 16% of our and consensus’ full-year estimates. The performance this quarter met our expectations, following the lower freight volumes observed in April and May and much weaker freight rates. The lower-than-expected volumes stemmed from the lack of activities mainly on account of the Aidil Fitri holiday in April and the long Golden Week holidays in Japan and China in May, as factories were shut down. PBT for its international business solutions segment come in at MYR4.1m (-66.3% QoQ; -77.7% YoY), dragged down by lower volumes and freight rates.

• Domestic business solutions. The contract logistics (CL) division overall PBT printed MYR7.6m (-21.2% QoQ; -28.5% YoY), mainly bogged down by warehouse and haulage. Nevertheless, the PBT drop in CL was partially cushioned by increases in its cold chain division, which improved 109% QoQ and 36% YoY to MYR3.1m, supported by new retail customers and higher selling rates due to the imbalance cost pass-through surcharged.

• Better quarters ahead. Despite the seasonal blip, the group sees an encouraging uptick in shipment volumes for June and July. The RHB economics team has reiterated its view of global growth recovery in 2H, in tandem with signs of a bottoming-out process in industrial production, retail sales, and PMI data in the majority economies throughout Asia ex-Japan. Malaysia’s trade momentum is likely to show an acceleration in 2H23 which would bode well for a logistics player like TASCO. With its two new warehouses expected to be ready by Nov 2023 and Jan 2024, we forecast TASCO will see a better 2H. We expect trade activities to recover and anticipate maiden contributions from its new warehouses, which would yield a better margin compared to its currently rented warehouse and would provide a lower effective tax rate.

• We retain our earnings estimates as we believe TASCO will catch up in the coming quarters. Our TP, which incorporates a 2% ESG premium, is pegged to an unchanged 15x FY23F P/E, in line with the historical mean. TASCO’s current valuation of 7.34x P/E is well below its local and regional peers’ average of 13.0x and 19.0x which justifies a BUY for Malaysia’s leading integrated logistics player.

• Key downside risks: Weaker-than-expected freight volumes, contract terminations, and higher-than-expected costs.

Source: RHB Research - 28 Jul 2023