This article first appeared in The Edge Financial Daily on October 9, 2018

GD Express Carrier Bhd
(Oct 8, 42 sen)
Maintain neutral with a revised target price (TP) of 46 sen: GD Express Carrier Bhd (GDex) had subscribed to 44.5% of shares in PT SAP Express Tbk (SAP) listed on the development board of the Indonesian stock exchange last Wednesday for RM25.8 million.

After taking into consideration the redemption of the five-year convertible bonds issued by SAP worth 30 billion rupiah (RM8.2 million), the redemption premium worth 37.2 billion rupiah (RM10.2 million), and the RM25.8 million investment in SAP Express shares, GDex is still in a next cash position above RM200 million. This will enable GDex to look out for further merger and acquisition opportunities in the region.

We view the acquisition of SAP shares by GDex to be positive in the long run as it enables GDex to tap faster into the Indonesian express delivery landscape. To recall, SAP, with around 70 branches nationwide, is one of the pioneers in Indonesia to adopt an Android-based operating system. Moreover, GDex’s participation in the initial public offering of SAP exposes GDex to the listing and legal requirements of merger and acquisition exercises, preparing the company if new expansions were to take place in Indonesia.

Management noted GDex’s 44.5% stake in SAP is currently only being recognised at fair value which is marked to market, the reason being GDex had yet to have a management agreement with SAP. Hence, the auditors opined that as GDex had yet to have significant influence on SAP, the equity method of accounting is not applicable for now to recognise the share of profit and losses from SAP. Nonetheless, it was guided by the management that an agreement between the two companies for GDex to have a management influence will most likely be done in the first half of 2019 (1H19) or the second half of financial year ending June 30, 2019 (2HFY19).

SAP has been experiencing losses since 2015 but at a declining pace. In the first quarter of 2018, SAP’s net loss narrowed down almost 20% year-on-year to 1.6 billion rupiah. SAP is expected to break even by 1H19. Meanwhile, interest income estimates for FY19 are reduced to reflect a lower net cash held by GDex, lowering our FY19 forecast earnings slightly to RM34.6 million.

We are also conservatively estimating a profit margin of 1% in 2H19, in line with its comparable listed peer (for SAP) such as PT Trimuda Nuansa Cipta. As such, we are revising our FY20 earnings estimate upwards slightly to RM39 million.

We value GDex using a two-stage discounted cash flow method assuming a weighted average capital cost of 8.8%, and a revised terminal growth rate of 2.1% (from 2% previously). Our revised terminal growth rate reflects a larger e-commerce growth in Indonesia driven by Indonesia’s large population of almost 250 million. While we are sanguine about the company’s expansion plans in the face of competition, valuations remain elevated at a FY20 price-earnings ratio of 69.2 times, hence our “neutral” recommendation.

Rerating catalysts for GDex would be entry into other Asean countries such as Vietnam and Cambodia, a stronger retail delivery network and services, and the Digital Free Trade Zone development. E-commerce will likely drive demand growth for air cargo and land logistics especially last-mile delivery services. — MIDF Research, Oct 8