Maintain HOLD

1Q19 results were below expectations on higher-than-expected initial start-up costs at its courier operations. While total logistics operations may remain flattish in the near term, we expect better contribution from its procurement logistic segment to provide some buffer. We cut our earnings forecasts by 37-39% for FY19E-21E. Maintain HOLD but with a lower DCF-TP of MYR0.41 (-9sen).

Below expectations

1Q19 core net loss of MYR1.8m (+MYR2.6m in 1Q18, +MYR0.6m in 4Q18), fell short of both of our and consensus full-year estimates. The shortfall was largely due to initial start-up costs at the courier operations and lower EBIT contribution from total logistics. That said, revenue was in- line with our expectation. No dividends were declared, as expected.

Higher revenue by procurement acted as a buffer

1Q19 procurement ops’ EBIT grew to MYR3.0m (+21% YoY, >100% QoQ) on the back of higher revenue of MYR58.2m (88.6% YoY, >100 QoQ), led by better export sales, particularly to its new customers in Vietnam. 1Q19 total logistics’ EBIT fell 53% YoY and 33% QoQ on lower margin despite higher revenue on higher utilisation of 80% (vs. 65-70% in 1Q18) and 100% of its warehouse capacity at Port Tanjung Pelepas (Johor) and Klang respectively. As for its courier service, it posted a sequential LBIT of MYR3.9m due to start-up costs.

Higher opex: Cut earnings 37-39%

We cut earnings by 37%/39%/37% for FY19E/20E/21E assuming more opex (e.g. courier operation start-up costs and new 3-story warehouse). We expect higher costs to be cushioned by stronger procurement logistics orders from both existing and new customers. Elsewhere, we understand that the construction of its 3-storey warehouse is 99% (estd.) completed and should be ready by July 2019. We maintain our HOLD call but with a lower DCF-based TP of MYR0.41 (-9sen, revised WACC: 10.8% (from 9.4%), long-term growth: 2.0%, revised capex of MYR100m for FY19 (from MYR80m)).

Source: Maybank Research - 27 May 2019