• Reiterate BUY and MYR1.86 TP, 109% upside with 4% FY23F (Mar) yield. Post our site visit to TASCO’s Shah Alam Logistics Centre (SALC), we came away reassured of its earnings visibility, amidst overdone concerns on freight rates. We believe it will continue to book record earnings again in FY23, by delivering a 4QFY23F bottomline of MYR20-25m. This would meet our estimate, on top of a potential final dividend payout ratio of 30%. We are also positive on the progress of TASCO’s warehousing and cold chain segment, in terms of its expansion plan and new business wins.

• Ground checks. The progress of the much-anticipated 600k sq ft SALC is on track (Figure 3), and TASCO expects to have a handover of rental space to its electrical & electronics and retail customers in Jan 2024. There is another 400k sq ft of leasable space under the SALC-Phase 2 expansion in the works – this is at the design stage, given the scarce supply and higher demand for warehouse space within the vicinity. Meanwhile, its new 250k sq ft West Port Logistics Centre (WPLC) expansion is expected to be completed by November, in time to cater to a new customer (Figure 4). TASCO’s cold chain operation is currently operating at 110% capacity, although we note that this “overflow” is mainly due to the festive season. We understand that TASCO expects to grow its capacity by another 16k palettes (current capacity: 56k palettes) by 4Q23, once the lease for its current tenant has expired.

• Investor concerns over the normalisation of freight rates are overdone, in our view. While revenue within the freight segment will fluctuate when these rates soften, earnings should be cushioned by TASCO’s ability to lock in ocean freight rates, and its strong bargaining power (better margins, stronger volumes). This would also help improve its earnings visibility, vs the period of elevated freight rates – where most rates are negotiated on a short-term basis. Meanwhile, TASCO’s well-diversified business model – with its strength in contract logistics and cold chain – coupled with the Integrated Logistics Solutions or ILS tax incentive should enable it to better sustain margins. Figures 1 and 2 show the consistency of the group’s past four quarterly PAT despite the sharp descent in ocean and air freight rates.

• Fourth-party logistics (4PL) business. TASCO’s global presence enables it to expand into 4PL, and manage the entire supply chain for its key client. Leveraging on its parent’s proprietary software solution and network, it aims to further grow its supply chain solutions business (currently accounting for 2% of group revenue) and maintain client stickiness by on-boarding more clients to employ its innovative and optimal supply chain solutions.

• Share price undervalues earnings consistency. We maintain our earnings forecasts and MYR1.86 TP, which implies an unchanged 15x P/E – in line with the historical mean. TASCO’s market valuation of 7.9x P/E is well below its local and regional peer average (Figure 5) – which justifies a BUY for Malaysia’s leading integrated logistics player that also records consistent earnings and offers handsome dividend yields. Its risk-mitigating strategy includes reducing third-party resources while keeping the utilisation rate of its own assets high. This should keep its margins wide, should a global recession happen. Key downside risks: Weaker-than-expected freight volumes, contract terminations and higher-than-expected costs.

Source: RHB Research - 17 Apr 2023