We believe GDEX has a solid earnings growth story with 3- year CAGR of 22.3%, riding on the booming e-commerce scene, with utilisation overload the only obstacle to overcome before achieving exponential growth. We also believe regional expansions through acquisitions are very likely and will serve as another major re-rating catalyst. We are initiating coverage on GDEX with an OUTPERFORM call at TP of RM1.97/DCF share. Second largest market share. Founded in 1997, GDEX grew to become the second largest domestic parcel delivery player in the country, behind POS, in terms of market share. Since listing in 2005, its bottom-line grew at an impressive CAGR of 28.2%. Its parcel express delivery can be categorised into business-to-business (B2B), and business-to-customer (B2C) which represents the company’s e- commerce delivery business with revenue mix as at FY16 standing at 26% and 74%, respectively.

E-commerce delivery as the main growth driver. Riding the growing domestic trend of e-commerce, we project its B2C delivery to grow 50%-70% in the next three years, surpassing B2B delivery revenue by FY19. The company saw 70% to as high as 500% growth in B2C delivery in the past three years, with a CAGR of 246%. Meanwhile, its B2B delivery business is expected to remain resilient, as we project a constant 3%-5% growth moving forward, leveraging on GDEX’s strong-standing relationships with its client base.

Overcoming a bottle-neck. We believe FY16 express delivery revenue growth could be higher (13.5% vs. 17.6% average 3-year prior), if not for capacity constrains faced in its sorting hub. Management recently restructured its sorting hub work-flow, which effectively increased its sorting capacity by 28%, from an average of 78k to c.100k pcs/day, which should be fully reflected in FY17. With the express delivery revenue projection growth of 15%-19%, we reckon this temporary fix will only last 1-2 years before reaching full capacity again. Management is currently on the hunt for an additional sorting hub to run concurrently to remove the existing growth constraint.

Regional expansion as a re-rating catalyst. Earlier in the year, GDEX underwent a private placement, with Yamato emerging as its second largest shareholder with 22.84% stake, raising RM209m cash for GDEX -a sizeable war chest for inorganic growth which GDEX has already tapped into to make a few early moves. Furthermore, we believe GDEX does not need to raise fresh fund to finance any capex for existing business as its current strong cash flows generating ability is more than sufficient. With the entire war chest solely for inorganic growth, we believe GDEX would end up with multiple acquisitions, with Indonesia the most likely target country.

OUTPERFORM with DCF derived-target of RM1.97, based on assumed (i) 7.8% WACC, (ii) terminal growth of 5%, and (iii) Beta of 0.9. Although the share price had already rallied 90% from its recent low in Aug 2015, we still see great upside potential in view of its strong earnings growth of 16%-31% for the next 3 years. Our TP implies a forward PER of 77x on FY17E, which is +0.5 SD above its 5- year mean of 63x. We believe the valuation is justifiable given: (i) that it has always traded at similar forward PER levels historically, reaching as high as 100x in June 2014, (ii) its superior margins over logistic peers (15.7% vs 5.7%), and (iii) its superior ROA, ROE and ROIC (11%, 13% and 9.3% vs domestic logistic peers’ average of 4.2%, 7.7% and 5.6% respectively), arising from its asset-light and operationally efficient business model, while FCF-yield and PEG are broadly in line with similar domestic and international peers.

Risks to our call include: (i) higher than assumed capex, and (ii) lower than assumed volume growth.

Source: Kenanga Research - 27 Dec 2016