Valuation / Recommendation

We derive an FV of RM0.14 for Sin-Kung, based on a 14x FY25 EPS forecast of 1.0sen. We believe the company deserves a premium valuation above its local peers (9-11x PE), given its niche in the logistics business (specialising in airport-to-airport road feeder services) and superior margins. A stronger rebound in air cargo traffic and/or recovery in the E&E sector will be key catalysts driving the stock's performance in the near term, before new warehousing capacity comes onstream by 2026.

Investment Highlights

Growth driven by rebound in air cargo traffic. Sin-Kung Logistics Bhd (Sin-Kung) derives its sales from trucking services (72-81% in FY20-23), and counts major airlines and freight forwarders as its key customers. As such, it is not surprising that Sin-Kung’s revenue is closely correlated with the movement of air cargo traffic in Malaysia. We share MAVCOM’s view that Malaysia air cargo traffic is likely to rebound from 2024 onwards, driven by a slew of factors, including 1) Upturn in the global technology cycle; 2) Potential recovery in China; and 3) A more stable economic outlook, supported by the end of central banks’ monetary tightening cycle. Overall, we believe this should drive the positive outlook for Sin-Kung, which underpins our 10-14% p.a. revenue growth forecast for FY24-26F.

Doubling warehouse capacity by 2026. Revenue for the warehousing business segment has jumped from RM2.8m in FY20 (6% of sales), to RM8.2m in FY23 (16% of sales), supported by new warehouse acquisitions over the years. Upon completion of the new Valdor Warehouse construction in 2026, the addition of 192k pallets will double Sin-Kung's existing annual capacity. This new warehouse is strategically located in Seberang Perai and will primarily serve customers in the northern region of Peninsular Malaysia (likely from the E&E sector).

Superior margins, less vulnerable to fuel subsidy rationalisation. SinKung commands above-average operating margins (25.6% in 2023) compared to other local peers in the logistics sector (3.5%-19.0%). This is perhaps due to the high-value items typically being transported via air freight, where speed and reliability are crucial. We believe the company is well prepared for the eventual implementation of fuel subsidy rationalisation by the government, as there should not be any significant issues for the company to pass on the cost increase to its customers, in our view.

Risk factors for Sin-Kung include (1) changes in the performance of the air freight industry; and (2) Fluctuations in diesel prices.

Source: Mercury Research - 26 Apr 2024