GD Express Carrier Bhd
(Sept 7, 42 sen)
Maintain neutral with an unchanged target price of 44 sen: To recall, GD Express Carrier Bhd’s (GDEx) normalised net profit for financial year 2018 (FY18) declined by -32.4% year-on-year (y-o-y) to RM25.1 million. This was mainly due to the higher annual tax rate of 47% (versus 17% in FY17) subsequent to the expiry of the pioneer status tax incentive on Sept 25, 2017 and the additional provision to address the possible clawback of the tax incentive post equity structure change in Yamato since February 2016. Meanwhile, management commented that it cleared all the additional tax payments of approximately RM8 million in FY18 and was in the process of applying for a new tax incentive. We maintain our conservative tax rate assumption of 25% for both FY19 and FY20 at this juncture.
GDEx’s subscription of convertible bonds worth 30 billion rupiah (RM8.4 million) issued by SAP Express will be redeemed upon the listing of SAP in October 2018. As per the preliminary prospectus, SAP plans to utilise 61.5% of the initial public offering proceeds which equal to 67.2 billion rupiah (nominal value: 30 billion rupiah, redemption premium: 37.2 billion rupiah) to redeem the five-year convertible bonds subscribed by GDEx in November 2016. While this indicates that GDEx will not be able to convert the bond into shares in SAP Express, management has guided that both parties will work out another form of collaboration. Aside from Indonesia, GDEx is also looking at other Asean countries to expand, such as Vietnam and Cambodia.
GDEx has shifted its warehouse operations from Hub 2 in Petaling Jaya to Mapletree Logistics Hub in Shah Alam. The Hub 2 in Petaling Jaya is earmarked to be a local trans-shipment hub for bulky shipments for the Singles Day and 12.12 Online Revolution sales. This would include enhancing the automation systems at Hub 2 by early FY20, with the aim to reach average sorting capacity to above 200,000 parcels per day. Meanwhile, the expansion works at the headquarters Hub 1 in Petaling Jaya will be completed in November 2018, ramping up the average sorting capacity to 120,000-150,000 parcels.
In spite of the expected increase in average sorting capacity, we opine earnings upside to be capped by pricing pressure fuelled by intense competition from new entrants. Henceforth, we make no changes to our FY18 and FY19 earnings forecasts at this juncture.
We value the company using a two-stage discounted cash flow method, which assumes a weighted average cost of capital of 8.8%, and a terminal growth rate of 2%. In addition to tougher competition which may limit earnings growth from the company’s expansion plans, valuation remains elevated at a FY20 price-earnings ratio forecast of 67.1 times, hence our “neutral” recommendation. — MIDF Research, Sept 7