Review

• CJ Century Logistics Holdings’ (CJ Century) 9M23 core profit of RM9.3mn after stripping out forex and disposal gains, came in below expectations at 54% of our full-year forecast and 30% of consensus estimates. The variance was largely due to lower-than-expected contribution from the freight forwarding segment.

• 9M23 core profit contracted by 59.1% YoY on the back of lower revenue, down 18.7% YoY, and margin compression. This dismal performance can be attributed to poor operational efficiency amid declines in freight volumes alongside lower freight rates. For this period, revenue from the total logistics solution segment (TLS) (Figure 1) slid by 29.3% YoY, driven mainly by the freight forwarding segment, which was down 49.9%. This more than offset increased contribution from the procurement logistics service (PLS) segment (Figure 2), which surged 15.3% YoY, driven by the resurgent exports of air-conditioners and TVs.

• QoQ, 3Q23 performance was sluggish with core profit declined by 33.6% to RM2.4mn. This can be attributed to lower contribution from the PLS segment due to seasonally weak E&E exports. This, coupled with 7.4% drop in TLS revenue, had resulted in lower PBT and core profit in 3Q23.

Impact

• We cut our FY23/24/25 earnings projections by 29.3/43.6/44.9% after revising the freight revenue lower by 10-15% with lower freight rate assumptions (i.e. RM2,700-3,000/freight).

Outlook

• Based on IMF forecast, 2024 global growth is expected to slow to 2.9% from 3.0% this year and this would not bode well for a freight forwarding company. Typically, the elevated interest rate in the US and Europe would start to reduce purchasing power, thus hampering global consumptions. So, the near-term prospect for freight forwarders would remain challenging.

• In FY2H24, however, we expect global trades to regain momentum when US begins to cut rates. More importantly, we see the dire need for supplychain management over the long term to avoid any trade disputes or rise in geopolitical tensions between big nations including China, US and Japan in the future.

Valuation

• We cut CJ Century’s fair value to RM0.50/share post earnings downgrade. Our valuation basis of 14x CY24 PE multiple is justifiable as the long-term prospects of third party logistics management would remain bright as far as global risk management is concerned. Maintain Buy.

Source: TA Research - 17 Nov 2023