Stock Highlights

Elevated freight rates. In 2024, air freight and sea freight rates, as measured by the Drewry Air Freight Index and the WCI Composite Container Index, have surged by 15% and 107%, respectively. These increases are attributed to widespread disruptions in global freight routes due to ongoing tensions in the Red Sea and political unrest in the Middle East and Ukraine. We expect rising cargo demand for high-tech semiconductors, coupled with geopolitical factors such as U.S. protectionist policies that may drive businesses to accelerate imports ahead of potential new tariffs, to sustain the elevated freight charges in the near term.

A better 2HFY25? Tasco's 1HFY25 earnings were relatively weak as it was impacted by one-off expenses for the demolition of an office block and forex losses from the stronger Ringgit. Notwithstanding that, we expect 2HFY25 earnings to improve for Tasco, driven by several factors. These include the continued upward trend in freight rates, the stronger USD following Trump's presidential win (44% of revenue is from the international division), and stronger seasonal demand. Additionally, we anticipate better contributions going forward from Tasco's newly built logistics facilities in Shah Alam and West Port, along with a lower corporate tax rate thanks to various government tax incentives (MIDA's ILP and Smart Logistic Complex)

Negatives largely priced in. The stock saw strong performance in the first half of 2024, driven by expectations of an earnings uplift from higher freight rates, but this did not materialise. Following a sharp 36% correction from its peak, we believe the negatives are largely priced in. At 9.6x FY25 consensus EPS, the stock trades at a -1 s.d. discount to its 5-year mean PE, presenting a compelling re-rating opportunity should earnings delivery improve in the coming quarters.

Potential trend reversal. Tasco's stock had been consolidating over the past few months. Recently, a recovery was observed, driven by increased buying momentum. This momentum has propelled the stock closer to a potential triangle pattern breakout. If the breakout is accompanied by sustained trading activity, the stock could target its first resistance at RM0.80 and its next resistance at RM0.86. Conversely, if the stock falls below RM0.73, a period of consolidation could follow. Stop loss: RM0.70.

Source: Mercury Securities Research - 18 Nov 2024