SWIFT Haulage - Red Sea Conflict Weighs

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+0.05 (10.00%)

SWIFT’s FY23 results met our forecast but beat market expectations. Its FY23 core net profit declined 11% due to higher operating and interest costs, an inevitable price to pay for aggressive expansion. We cut our FY24 net profit forecast by 12% to reflect the escalating Red Sea conflict. Correspondingly, we reduce our TP by 13% to RM0.55 (from RM0.63) and maintain our MARKET PERFORM call.

Its FY23 core net profit (excluding one-offs at RM12.4m) met our forecast but beat market expectations by 31%. It declared an interim NDPS of 0.8 sen vs 1.0 sen in 4QFY23, which bring full-year NDPS to 1.6 sen vs 1.0 sen in FY22, within expectations.

YoY, its FY23 revenue grew 4% driven by: (i) land transportation (+14%) with the increased transportation activities for petrochemical products, particularly for the Petronas group of companies (close to 20% of revenue) and (ii) warehousing and container depot (+19%) with the increased capacity utilisation by new customers. These more than offset the weaker container haulage (-4%) and freight forwarding (-14%) from the lower gateway volume toward the year-end particularly from Johor port.

However, its core net profit declined by 11% due to higher operating expenses (+11%) and finance costs (+27%) to support its warehouse expansion and green fleet initiatives, namely: (i) the addition of two units of fully-electric prime movers (c.RM1.5m each), and (ii) the full upgrade of its ICE prime mover fleet to the state-of-the-art fuel-efficient Euro 5 model from the Euro 3 model, expected to be completed by April 2024 (currently, SWIFT owns 1,546 prime movers).

QoQ, its 4QFY23 revenue rose 3% driven by higher demand for its land transportation (+9%) and warehousing and container depot (+7%), which more than offset the weaker contribution from its container haulage (0%) and freight forwarding (-7%). Its core net profit rose by a steeper 24% largely due to the utilisation of the investment tax allowance (ITA).

The key takeaways from its results briefing are as follows:

1. SWIFT echoed WPRTS’s guidance for a low single-digit container volume growth rate in FY24 as it believes the Red Sea conflict, if prolonged, will weigh on the Europe-Asian trade. Nonetheless, it is slightly more positive on FY25, guiding for a single-digit container volume growth rate. SWIFT depends more on gateway cargoes which have since weakened to a single-digit growth (vs. double-digit in 1HCY23). Thus, we lower our volume growth assumption to 2% (from 7%) in FY24 for its container haulage segment and introduce the same assumption for FY25.

2. Its new warehouse in Westport (260k sq ft) will commence operation on 1 Mar 2024 with 70% of space taken up by Sharp (distributor of white goods). Meanwhile, its Tebrau warehouses (200k sq ft) will onboard a new customer in Apr 2024, boosting its occupancy rate to 80% (from 60%). It hopes to lease the remaining 20% to Singaporebased businesses as their distribution hubs given the warehouse’s proximity to Tuas Second Link. However, occupancy of its PKFZ warehouse (178k sq ft) is unchanged at 30% from three months ago. It is in active discussions with potential tenants. In terms of total warehouse space, we maintain our assumption of 1.7m sq ft in FY24F (+30%) and introduce an assumption of 1.9m sq ft (+17%) for FY25F.

3. It will leverage on its new shareholder, Thailand-listed SCGJWD Logistics PCL, to expand its cross-border trucking by utilising SCGJWD’s wide logistics network in Thailand. Note that, JWD Asia recently bought a 20.44% stake in SWIFT. It is onboarding a new customer, i.e. Sharp, for the use of its land transportation service in Mar 2024, in addition to warehousing service in Westport. We maintain our volume growth assumption of 5% in FY24 for its land transportation segment and introduce the same assumption for FY25.

Still in expansion mode. SWIFT has completed the expansion of its warehouses in Tebrau (from 108k sq ft to 308k sq ft), Seberang Prai (from 113k sq ft to 222k sq ft), Port Klang Free Zone warehouse (178k sq ft), and cold chain warehouse in Sabah (from 27k sq ft to 57k sq ft, Westport on-dock depot (5 acres for 4,000 TEUs), Westport warehouse, Pulau Indah, Selangor (260k sq ft; completion by 1QCY24) as well as commenced warehouse management and transportation services in Pengerang for Petronas (c.1.17m sq ft).

Its on-going expansion plans include: (i) a warehouse in Seberang Perai, Penang (118k sq ft; acquisition completion by 1QCY24), and (ii) the biggest green logistics hub in Asia (outside China) under 42.5%-associate GVL (first phase of 2.8m sq ft by May 2025, 6.0m sq ft when fully completed by 2028).

Forecasts. We cut our FY24F net profit forecast by 12% to reflect lower container haulage volume growth due to the escalating Red Sea conflict. We also introduce FY25F net profit forecast of RM52m (+7%).

Valuation. Correspondingly, we cut our TP by 13% to RM0.55 (from RM0.63) based on an unchanged FY24F PER of 10x, inline with the average forward PER of the local logistics sector. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like SWIFT for: (i) its leading position in the Malaysia haulage market commanding close to 10% share, (ii) its value-adding integrated offerings resulting in a superior pre-tax profit margin of c.10% compared to the industry average of 4%, and (iii) the tremendous growth potential of its warehousing business, riding on the booming domestic e-commerce. However, we believe current market valuations have fully reflected its fundamentals. Maintain MARKET PERFORM.

Risks to our call include: (i) sustained high fuel cost, (ii) global recession hurting the demand for transportation service, and (iii) delays in its warehousing expansion plans.

Source: Kenanga Research - 26 Feb 2024

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