Review

• CJ Century Logistics Holdings’ (CJ Century) 1Q24 core profit of RM1.8mn missed expectation, accounting for 8% of both our and consensus’ full-year forecast. The variance was largely due to lower-than-expected margins.

• 1Q24 adjusted PBT and core profit slipped 38.4% and 45.8% to RM3.1mn and RM1.8mn respectively. The disappointing results were due to 15.5% drop in revenue from the total logistics solution segment (TLS) (Figure 1), which partially mitigated by 21.7% rise in revenue from the procurement logistics segment (PLS) (Figure 2). In specific, the decline in TLS revenue can be attributed to lower freight volume as contributions from 2 key customers dropped. Meanwhile, the surge in PLS revenue was due to higher exports volume.

• On QoQ basis, CJ Century managed to turnaround on the back of a significant 46.8% rise in revenue. The recovery came mainly from settlements of lost and damaged stocks in the preceding quarter, leading to 5.7% improvement in TLS revenue.

Impact

• We cut FY24-26 earnings projections by 30-37% after adjusting margins lower by 1.2%-pts due to diseconomies of scale.

Outlook

• The world container freight rates (Figure 3) have stemmed the recent fall (to US2,706 on April 25) from Jan peak (at US3,964 on Jan 25) as Houthi Red Sea attacks are still prevalent today. Underpinning all of this is a sustained recovery in freight rates, which we do not think it would revisit the previous low of US1,300 levels in the short term.

• The rebound in freight rates is expected to bode well for freight forwarders and we expect the impact to be felt in CJ Century’s 2Q24 results performance. Specifically, we continue to believe the global supply chain would be highly uncertain this year amid geopolitical tension, US-China trade war and US presidential election. As such, we expect a resurgent demand for third-party logistics management to mitigate the risk of supply disruption.

Valuation

• Following the earnings downgrade, we cut CJ Century’s fair value to RM0.37/share (from RM0.50 previously) based on revised 14x CY25 EPS. Maintain Buy

Source: TA Research - 24 May 2024