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Tuesday, September 23, 2014

Tasco Bhd - Fully valued for now

Source: http://klse.i3investor.com/blogs/kenangaresearch/60321.jsp

Robust share price performance. Since our last “On Our Radar” report on TASCO in May this year with a Trading Buy call, its share price has surged 28.3% in the space of four months and surpassed our target price significantly possibly due to: (i) its robust 2QCY14 financial results driven by stronger air freight division and (ii) increased awareness of the value in the logistics service provider with undemanding valuation of 9.1x FY15E PER back then and stronger outlook on the local logistics industry underpinned by higher digitalisation thus leading to higher usage of logistics service for online shopping.

Change of financial year-end from Dec to Mar. In 2QCY14, TASCO had announced a change in their financial year ending from Dec to Mar. Therefore, the FY13 will consist of 5 quarters. On the other hand, we have projected FY15E and FY16E earnings based on new financial year-end, which amounts to RM28.5m and RM29.6m respectively. We believe the earnings projections are conservative given that in 1Q15 the group has already achieved RM10.0m net profit, which accounts for 35.1% of our full-year FY15 projection. The main reason behind our conservatism is that the management expects earnings to be slightly weaker in the coming quarters compared to 1Q15.

Do not discount possibility of acquisitions. The group has been constantly searching for potential candidates for acquisition in the local logistics industry due to its robust balance sheet with net cash position. However, management has indicated that they are not in a rush to acquire logistics companies as they are looking for acquisition at reasonable valuation with synergies to the group and they will be highly selective. Given the recent strong showing of small caps especially for the logistics sector recently, we believe the management’s approach is prudent and timely.

The beginning of digitalisation era. We believe that there is a secular trend in the logistics industry in the long-run whereby online retailing will soon dominate the traditional brick-and-mortar retailing business model. This, in our opinion, will give a shot-in-the-arm for the local logistics industry as more sophisticated distribution and warehousing system is needed by retailing companies. This will in turn give rise to higher importance of logistics services providers in the business value chain. Although some online retailers have started utilising TASCO’s warehouse space, TASCO has yet to fully position itself to benefit from this trend as they are more focused on upstream freight forwarding whereby goods are usually transported in bulk instead of going through courier service providers which we opine will ride on the digitalisation trend.

Great company but valuation is not compelling. Although we believe TASCO’s fundamentals remain robust with outlook looking strong, we believe that its valuation is not compelling at the moment with CY15 PER at 11.6, which is slightly higher than FBM Small Cap index which is trading at 10.3x CY15 PER. After rolling forward our valuation from CY14 to CY15 and re-rating its multiple to 11.0x from 10.0x due to its strong fundamentals coupled with positive prospects of the local logistics segment, our fair value is revised upward to RM3.23 from RM2.79 previously.

Source: Kenanga

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