Review

• CJ Century Logistics Holdings’ (CJ Century) 1H24 core profit of RM2.2mn was below expectations. The variance was largely due to lower-than expected earnings contribution from the oil logistics division.
• 1H24 adjusted PBT and core profit slipped 61.8% and 68.0% YoY to RM3.9mn and RM2.2mn respectively. The disappointing performance was largely due to 16.6% YoY decline in revenue from the total logistics solution segment (Figure 1), led by the oil logistics (-48.5% YoY) and freight forwarding (-24.0% YoY) divisions. The decline was partially mitigated by the procurement logistics segment (PLS) (Figure 2).
• We attribute the decline in freight forwarding, which accounted for 20.5% of 1H24 revenue, to lower volume resulted from the Red Sea crisis. Meanwhile, the increase in earnings from the PLS sector was due to rising export volume of air conditioners.

Impact

• We cut FY24-26 earnings projections by 15.9-50.9% after reducing contributions from the oil logistics and freight forwarding segments, resulting in EBITDA margin contraction of 0.2-0.9%-pts due to diseconomies of scale.

Outlook

• The world container freight rates (Figure 3) have rallied (to US5,937 on July 18) from the previous trough (at US2,706 on April 25) and we believe the global shipping liners have adjusted and adapted to the situation where Houthi Red Sea attacks are still prevalent. As such, we believe the container freight rate to stay put at US5,000 levels unless there is another major disruption that would affect global trades.
• Besides geopolitical tensions, the US presidential election in Nov-24 is expected to cause a shake-up to the world economy. In our opinion, neither the proposed import tariffs by the Republican party, nor the rise in corporate tax to 28% by the Democrat party would help to spur the economic growth. The tariffs would likely disrupt the global supply chain further. As such, we continue to expect a robust demand for third-party logistics management to mitigate the risk of supply disruption.

Valuation

• Following the earnings downgrade, we cut CJ Century’s fair value to RM0.31/share (from RM0.37 previously) based on unchanged 14x CY25 EPS. Downgrade to Sell

Source: TA Research - 23 Aug 2024