KEY INVESTMENT HIGHLIGHTS

• 2QFY25 earnings below projections
• Weaker domestic business likely tied to U.S. sanctions on solar panel customer
• Freight forwarding margins up from lower buying costs
• No changes to earnings estimates
• Maintain BUY with an unchanged TP of RM1.20

Below expectation. Tasco Berhad (Tasco) announced a core PATAMI of RM13.4m for 2QFY25, raising the total for 1HFY25 to RM24.7m, which accounts for 38% of our full-year estimates. We consider this to be below expectations due to the weaker-than-expected performance of its domestic business.

Quarterly. Revenue saw an increase (+8.1%yoy) compared to 2QFY24, mainly driven by a boost in air and ocean freight shipments. This helped counterbalance the weakness in the contract logistics division (- 22.3%yoy), which was likely affected by decreased shipments from a major solar panel customer impacted by U.S. sanctions. The cold supply chain (CSC) division (-7.4%yoy) also experienced weaker revenue due to the ongoing Israel boycott. As expected, PBT margins for the air and ocean freight divisions improved due to higher tender prices compared to buying costs. However, overall core PATAMI (-6.5%yoy) declined due to a reduction in investment tax allowance (ITA). Sequentially, core PATAMI (+20.1%qoq) increased due to higher revenue from all divisions except the CSC.

Outlook. Market ocean freight rates are expected to remain elevated, despite being on a downward trend since Jul-24. The majority of Tasco's freight business still operates on a tender basis, and customers' preference for short-term contracts of 3 to 6 months offers some earnings visibility. Tasco is partly safeguarded from fluctuations in market freight rates because of a newly implemented clause that permits revisions in tender prices. In addition, we remain optimistic about the warehousing business, as demand remains strong, and the increase in capacity provides cross-selling opportunities for transportation services. Tasco has begun an extension of its 4-storey Shah Alam Logistics Centre, which will add 400,000 sq ft of lettable space connected to the existing 600,000 sq ft warehouse, with completion expected in CY26.

Maintain BUY. We are maintaining our earnings estimates for now, awaiting further guidance from the results briefing. Our target price remains at RM1.20 (based on 14x FY25F EPS). The stock is trading at 8.8x FY25F EPS, which is -1.0SD of its 5-year historical mean. Key downside risks include: (i) the loss of a major customer, (ii) fluctuations in freight rates, and (iii) a decline in trade activity.

Source: MIDF Research - 30 Oct 2024