• D/G to NEUTRAL from Buy, new MYR0.64 TP (DCF) from MYR0.68, 5% upside and c.6% yield. 1HFY24 (Jun) core earnings of MYR17m were slightly below expectations at 44% of our FY24 forecast. We downgrade our call on FM Global given the absence of exciting catalysts. FM is also fairly valued now, trading at 10.1x, ie closely aligned with its pre-COVID-19 historical mean of 10.3x.

• 1HFY24 came in slightly below expectations. 2QFY24’s core profit was down 13.3% QoQ (-23.4% YoY) to MYR7.9m after stripping off exceptional items. This brought the 1HFY24 figure to MYR 17m (-22.5% YoY), at only 44% of our FY24 full-year estimates. The sluggish quarterly performance was dampened by the weak domestic and global economies, higher staff costs, and lower volumes due to keener competition.

• Container volume analysis. Sea, air, and land freight’s 1HFY24 volumes stood at 55,482 TEUs, 4.183m kg, and 8,410 TEUs, which represent 53%, 42%, and 60% of our FY24 estimates. By comparison, 1HFY23 sea, air, and land freight recorded -5.2%, -30%, and +38.4% YoY changes. Air freight volumes still underperformed as demand remained weak. Within full container load (FCL) volumes, 1QFY24 was relatively stable at 46,922 TEUs (-1.3%), with a lower sea FCL compensated by a robust 39.8% growth in land FCL.

• Outlook. The land freight and 3PL sectors continue to demonstrate promising growth in gross profits, with YoY increases of 68.7% and 20.3%. However, FM’s short-term outlook remains subdued, as freight rates and volumes are returning to pre-pandemic levels. Although the tension in the Red Sea crisis has led to a rise in ocean freight rates, these increases are being fully passed on to customers, resulting in a neutral impact on the group. If demand were to increase significantly, and supply constraints tighten, this could present better pricing opportunities for major volume forwarders such as FM.

• Valuation. We trim our FY24F-26F earnings by 2-10% post results to account for the slower recovery in volumes and freight rates. Our DCF- derived TP is now MYR0.64 after incorporating a 6% ESG premium, as FM’s ESG score of 3.3 is above the 3.0 country median. We also downgraded the stock to NEUTRAL, given the absence of exciting catalysts and FM’s current fair valuation, which is trading at 10.1x. This is closely aligned with its pre- COVID-19 historical mean of 10.3x.

• Key risks include slower-than-expected volumes within the sea and air freight divisions, higher-than-expected opex, and a slowdown in global trade activities. The opposites represent the upside risks.

Source: RHB Research - 23 Feb 2024