Review

• CJ Century Logistics Holdings’ (CJ Century) 1Q23 core profit amounted  to RM3.3mn, which was below expectations at 10% of our and consensus’  full-year estimates. The variance was largely due to higher-than-expected  operating cost and tax.

• 1Q23 core profit contracted by 62% YoY underpinned by lower revenue,  which declined 9.6% to RM219.6mn. In specific, the drop in revenue can  be attributed to lower freight volume and freight rates normalisation  (Figure 3), which led to reduction in operational efficiency. As such, the  adjusted PBT margin slid 3.0%-pts to 2.3% in 1Q23. The lower freight  contribution was partially mitigated by recovery in procurement logistics  segment (PLS), thanks to increased assembling volume and exports of E&E  (Figure 4).

• QoQ, revenue and core profit grew 7.4% and 87.4% with increased net  margin to 1.5% versus 0.9% in 4Q22. The improvement in earnings was  mainly due to absence of one-off staff bonus.

Impact

• We cut our FY23/24/25 earnings projections by 46.5/7.8/7.5% revising the  operating cost and tax higher.

Outlook

• FY23 earnings from the total logistics solution (TLS) segment, freight  forwarding in particular, would likely be under pressure with the slowdown  in South Korea’s trades. The impact would be amplified by normalisation  of global freight rate. Note that South Korea’s exports have fallen for a  seventh straight month in April, down 14.2% in Apr-22. This was the  longest losing streak in three years. Meanwhile, the global container freight  index has returned to the pre-pandemic level, hovering at US$1,437 now  compared to about US$9,600 in Jan-2022.

• The PLS segment is expected to remain robust as China’s reopening would  ensure consistent supply of electrical and electronic components which is  important to CJ Century’s E&E assembling in Malaysia. As such, our  assumptions of 3% growth in both assembling unit and export unit are kept  unchanged.

Valuation

• Rolling forward the valuation base year to FY24, the fair value of CJ Century  is reduced to RM0.76 (from RM0.88) based on revised 12x CY24 earnings.  We have reduced the target multiple for the logistics industry to 12x (from  16x previously) due to gloomy global trade outlook. Maintain Buy

Source: TA Research - 19 May 2023