Key takeaways from CJ Century Logistics Holdings’ (CJ Century) briefing are as follows:

• A new profit trend;

• No impact of Chengdu’s lockdown on earnings; and

• Future growth strategies and capex plans.

We maintain our FY22-24 earnings projections. Target price is maintained at RM0.95/share. Maintain Buy on CJ Century.

A new profit trend

CJ Century extended its profit trend with quarterly earnings of RM7.7mn in 2Q22, reinforcing the group’s long-term fundamentals after ceasing the courier service business. Figure 1 dicpicts that the exit from courier service business in 2Q21 has put a stem on quarterly losses and supported earnings stability. Note that CJ Century has recorded quarterly profit of more than RM7mn for three straight quarters with stable margin of 3.4%.

The stable profit has prompted CJ Century to declare a 0.5sen/share dividend in 2Q22, which is long gone since 4Q18. According to management, the board would revisit the idea of dividend policy after 4Q22 results performance. Having said that, we do not think it is too optimistic for the group to sustain a dividend payout ratio of 25% for FY22-24.

No impact of Chengdu’s lockdown on earnings

The revenue mix between total logistics and procument logistics has tilted to 77%:23% in 1H22 from 74%:26% in 1H21 driven mainly by buoyant freight forwarding and warehousing units that helped mitigate the earnings weakness in the procument logistics division. According to management, the procument logistics registered 3.2% decline in revenue and 7.2% drop in EBIT for 1H22. This was mainly due to supply disruption resulted from Shanghai’s lockdown. However, the situation has normalised following the gradual easing in 2Q22, contributing to strong revenue and EBIT recovery of 54.4% and 71.5% QoQ respectively in 2Q22.

With regards to Chengdu’s lockdown, we understang from management that CJ Century does not procure any TV and aircon components from Chengu, where it usually purchase from Shanghai and Guangzhou, thus the impact of Chengdu’s lockdown is expected to be muted. As far as recessionary risks in EU and US are concerned, the company is prone to slowdown if Malaysia’s trades were badly hit.

Future growth strategies and capex plans

CJ Century’s future growth strategies will be focused on three main areas, i.e. Digitalisation & Modernation, Expansion of Customer Acquisition Effort, and Logistics Footprint Expansion. All in all, the growth strategies will involve capacity expansion to support the company’s endeavour in expanding client base, while rationalise its cost structure through technology-enabled logistics solutions. CJ Century has planned to invest up to RM350mn by 2025 to increase its warehousing capacity by 1,000 sf. In addition, it targets to renew 20-35 trucks and trailers to improve its trucking efficiency. Also, the expansion of production lines to boost its assembling capacity would help lift earnings from the procurement logistics higher in the future.

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 - 5 Sept 2022