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CJ Century Logistics Holdings (CJ Century) is expected to release its 2Q22 results performance end of this month. We expect the earnings to accelerate off the low base last year and continue leveraging on sky-high freight rate and recovering freight volume. In specific, we expect 2Q22 core profit to come in the range of RM6-10mn, which is 2-3x more than the RM3.0mn profit from continued operations recorded in 2Q21.

Normalisation of freight rate

China’s Covid-19 lockdown especially in Shanghai from March to May this year has helped to ease the shipping constraint as consumption and manufacturing activities have slowed when the world’s factory was temporarily shut. Global Container Index (Figure 1) took a tumble and fell to the range of USD6,500- 9,400 levels in 2Q22. The index is expected to normalise further in 2H22 as inflation threat and recession fear in EU and US are expected to take a toll on global economies.

According to management, the decline in freight rate will have Neutral implications on earnings as the expected drop in freight revenue will be offset by the decline in freight cost. As far as margins are concerned, it would depend on the freight volume, which determines the scale of operational efficiencies. In our opinion, judging from Malaysia’s strong trade data and Westports’ stable gateway volume for 2Q22, we believe CJ Century to handle slightly more freights than the same period last year and this would yield positively on margins. Note that Malaysia’s total trade increased 32.7% YoY while Westports registered a flat gateway volume growth for 2Q22.

Rising tension in Taiwan Strait

The Chinese military drills in Taiwan Strait following U.S. House Speaker Nancy Pelosi’s visit to Taiwan is expected to disrupt global supply chains, forcing vessels to reroute away from the dangerous zone. Also, China has cut the bilateral trades with Taiwan and we expect this to cause some trade imbalances in this region. In our opinion, the global supply chain disruption would intensify if the tension escalates further and this would augur well for freight forwarders and warehouse operators like CJ Century. Note that over the past 2 years, CJ Century has benefited from wide adoption of “Just-in-case” inventory management approach as the company has been able to provide reliable integrated logistics solutions in dealing with growing trade complications.

Impact

No change to our FY22-24 earnings projections.

Valuation

We maintain CJ Century’s fair value at RM0.95/share, based on unchanged 16x CY23 EPS. CJ Century is still our favourite pick under the high freight rate environment. Maintain Buy

Source: TA Research - 9 Aug 2022