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Tuesday, December 27, 2016
Brokers Report: TASCO Berhad - Challenging Times Ahead
We are closing our position on TASCO. (Previous call: Trading Buy). While it may be poised for a recovery over the longer term, arising from its expansion plans, the current poor share price performance coupled with a stagnating earnings outlook in the short-to-medium term render limited upside to the stock. It is now a NOT RATED stock with a fair value of RM1.54.
Poor share price performance. We last highlighted TASCO in On Our Radar report series in May last year, with a Trading Buy call. However, its share price has plunged 27%, from RM2.06 (pre-adjustment: RM4.12) to close at RM1.50 last Friday, bogged down by a disappointing set of FY16 results, coming in at only 64% of our previous earnings projection on the core level (actual CNP of RM25.2m vs. previous projection of RM39.4m), arrived after stripping off RM5.4m gains on disposal of PPE. The poor results were mainly due to an overall low volume demand, particularly for its domestic segments. Earnings outlook is expected to remain stagnant, as we introduce our FY17-18E earnings projection with an implied CNP growth of - 5.5%/7.5%, mainly premised on the poorer international segments performances.
Neutral international outlook. After posting positive results for its international segments in FY16, with a segmental profit growth of 263%, 1H17 results were rather disappointing, growing at only 2.4% YoY, from RM5.5m to RM5.6m, despite posting a respectable revenue growth of 19.7% YoY from RM97.4m to RM116.6m. This was due to increased competition in business contracts, which resulted in higher operating costs – particularly for its Air Freight Forwarding business, where margins dropped to a meagre 1.8% from 5.9% in FY16. Going forward, we expect FY17E international earnings to normalise from the strong growth last year with a projected segmental earnings decline of 19.9%, before posting noticeable growth in FY18 with projected growth of 20.8%. Furthermore, we believe that the shipping-line merger between its parent NYK, K Line and MOL will have very minimal impact at TASCO level. One silver lining is that TASCO is a beneficiary of a stronger USD, with a sensitivity analysis suggesting PAT impact of c.RM2m for every 5% change of the USD.
Domestic earnings recovery. The domestic segments posted positive 1H17 results with a YoY earnings growth of 24.1%, from RM9.9m to RM12.3m, due to greater custom clearance and haulage volume coupled with improved bottom line from Southern region warehouses. While the growth is fairly healthy, it benefitted from the low base last year. While we project that FY17E domestic segments will see a 44.4% growth, recovering from the overly poor performance in FY16 when earnings plunged 60.4% from RM40.2m to RM15.9m, we expect the segment to maintain its sluggishness going into FY18 and beyond, with a mere 1% growth projection, as top line is capped by high utilisation of its warehouses while margins is expected to have thoroughly recovered. Contract logistics, one of the two divisions within its domestic segment, has been suffering deteriorating revenues for the past two FYs, while the trucking division continues its struggle to break even.
Future expansions. Management guided their intention to invest in cold chain logistics, aiming to make up c.15% of revenue in the next 3-4 years, with a planned total capex outlay of RM100m to RM150m. While we understand that cold chain logistics is a niche market, it is expected to fetch much higher margins given high capex and specialised services required. We identify TNLOGIS to be the closest competitor as it already has a stable footing in the cold chain industry. Additionally, TASCO also guided that they are aiming to expand its warehousing space to 500k sq ft within the same 3- 4 year time period, more than double the current 200k sq ft capacity, which contributed RM17m PBT in FY16, under its contracts logistics division.
NOT RATED, with Fair Value of RM1.54; derived based on a forward PER on FY18E of 12x, which is +0.5SD above its 5-year mean of 10x. We lowered our PER valuation by 0.5x from our last report, in view of the deteriorating outlook. Thus, with the limited upside, we are closing our previous Trading Buy position with a NOT RATED call.