• Maintain BUY and MYR1.12 TP, 53% upside with c.3% FY25F (Mar) yield. TASCO remains confident about its upward trajectory going into 2HFY25, following its improved performance in 2QFY25. This is supported by: i) New business projects, ii) contributions from new warehouses, and iii) a lower effective tax rate. Budget 2025’s new tax incentive for smart logistics complexes (SLCs) could provide fresh catalysts for long-term growth and ROI. Management is also contemplating paying a potential interim dividend.

• A much improved 2QFY25. Quarterly revenue and earnings recovered to MYR295.7m (+18% QoQ, 8% YoY) and MYR13.6m (+20% QoQ, -14% YoY) from lows in 1QFY25F, thanks to TASCO’s margin and volume recovery in all but one segment. Meanwhile, YoY earnings growth decelerated, being affected by a higher effective tax rate (21.8%), net interest expenses and realised FX gain/loss. Notably, operating income was flattish YoY, with a stronger international business solutions (IBS) unit offsetting the softer numbers from the domestic business solutions (DBS) segment.

• DBS performance should continue improving into 2HFY25F, driven by a new healthcare customer, higher volume of E&E orders and the occupancy rates of its warehouses - with new projects to begin in phases from October onwards. 1HFY25 PBT fell 21% YoY, dragged by lower contributions from its solar panel customer due to US tariffs, but partly offset by new premium automotive customers and a higher order volume from existing E&E customers. Its cold chain business booked flattish numbers, with its warehouse space at near-full capacity, but volume recovery from the F&B customers was seen as the boycott sentiment from consumers alleviated.

• IBS unit’s 2QFY24 PBT surged 107% QoQ (+73% YoY) to MYR5.8m, due to more favourable freight rates. TASCO expects this division’s operating margin to rise going into 2H25, amid stabilising freight rates. Freight demand remains below last year’s peak, hence rates are stabilising amidst increased vessel supply. It is locking in buffer rates to mitigate potential rate drops.

• Other updates. The new SLC tax incentive has led management to revisit its Northport warehouse rebuilding plan to maximise the new tax incentive. To date, the group has MYR32.7m in unutilised tax credits. Further expansion in the Johor-Singapore Special Economic Zone will also be considered based on opportunities and demand. We expect the minimum wage hike to have a minimal impact on TASCO’s numbers, as the higher costs will be passed on to customers as per normal practice, with different levels of surges in rates and changes depending on the service.

• TP and rating. We continue to like this leading integrated logistics player with diversified businesses, solid cash flow generation, healthy dividend yields, and growth prospects, on top of its attractive valuation. We make no changes to our earnings forecasts, and our TP is still pegged to 12x CY25F P/E, with a 2% ESG premium imputed. Key downside risks: Loss of key customers, slowdown in trade activities, and decline in operating margins.

Source: RHB Securities Research - 5 Nov 2024