This article first appeared in The Edge Financial Daily on January 29, 2018

KUALA LUMPUR: Logistics players are hoping the new year will bring a reversal of fortunes, supported by stable economic growth as their prospects are much related to the performance of the economy. For most, 2017 was challenging mainly due to increase in operating costs amid intense competition in the industry.

According to Century Logistics Holdings Bhd executive director Edwin Yeap, a stable ringgit and fuel price will make it easier for logistics companies to plan ahead.

“We have seen volumes rising in the first half of January,” he told The Edge Financial Daily.

The group recorded an operating profit of RM17.11 million in the nine months ended Sept 30, 2017, a decrease of 15% compared with RM20.175 million a year ago, mainly due to lower activity in its total logistics services and procurement logistics services operations.

This year, Century Logistics is banking on its parcel delivery operation to prop up earnings numbers. This is on the back of an increase in broadband penetration, which is expected to facilitate growth in e-commerce volume.

“Based on the numbers we have seen, Malaysia has an e-commerce user penetration rate of about 4% to 5% [of the population] versus 20% to 25% in countries such as Japan and South Korea. So, there’s still a lot of room to grow,” Yeap said.

Export growth is also expected to give logistics players a boost this year. Export growth in November rose by 14.4% year-on-year, above market expectations. That was the 11th consecutive month of double-digit growth in exports for 2017.

“Logistics companies will continue to be the beneficiaries of growing external trade and a rising Manufacturing Purchasing Managers’ Index (PMI),” MIDF Research analyst Adam Mohamed Rahim told The Edge Financial Daily via email.

The Nikkei Malaysia PMI has been on the climb, hitting a 43-month high in November 2017 at 52 points. This indicated a pickup in manufacturing orders and was the third time the figure registered an expansion, he noted.

“We continue to be positive on companies such as Tasco Bhd, which commissioned its global distribution hub for [Japanese semiconductor manufacturer] Renesas Electronics Corp,” said Adam.

He noted that companies such as Tiong Nam Logistics Holdings Bhd are facing margin pressure, while GD Express Carrier Bhd (GDex) has been incurring higher operating costs due to manpower cost, fuel cost and warehouse space expansion.

Both companies saw their net profit for the most recent quarter ended Sept 30, 2017 falling below analyst estimates.

Despite maintaining a “buy” call on freight forwarder and cold chain services provider Tasco, MIDF Research lowered its target price to RM2.68 per share after the group’s net profit for the first half ended Sept 30, 2017 fell short of expectations.

“Nonetheless, we believe the increase in GDex’s operational assets is necessary in order to remain operationally competitive due to the rising demand in e-commerce activities,” Adam said.

It also helps that the Malaysian government has always recognised the logistics sector as a vital component of the economic performance of the country, promising to introduce measures to resolve bottlenecks and increase efficiency, such as the creation of the National Logistics Task Force (NLTF) chaired by the transport minister.

“We are now engaging with the World Bank to improve our logistics and trade facilitation sector,” NLTF chief executive officer Gan Thye Heng told The Edge Financial Daily.

An analyst with a local investment bank, meanwhile, is of the view that the hype surrounding the Digital Free Trade Zone may have already run its course, adding that logistics stocks would have already priced in visible positives. Shares in logistics companies surged in March last year after Alibaba Group Holding Ltd announced that it was setting up warehousing facilities in Malaysia.

“Unless earnings growth picks up soon to meet current valuations, this could be the end of the recent rally in logistics stocks,” he said.

“Thus far, most [logistics companies’] earnings have missed consensus expectations,” the analyst added.

As the sector’s low barrier to entry continues to fuel competition, the courier segment is likely to see more consolidation in the near to medium term, said GDex managing director Teong Teck Lean.

With growth of the e-commerce market continuing to attract new players, the group expects more intense competition in the express delivery industry, with some impact on its business margin.

Teong pointed out that the backing of large venture capital funds behind on-demand logistics start-ups such as GoGoVan, Lalamove, Deliveree, Ninja Van and TheLorry has been one of the factors driving competition in the sector.

However, Teong maintained that GDex is more interested in growing organically in Malaysia instead of looking for merger or acquisition opportunities over the next few years.

Century Logistics’ Yeap echoes the sentiment. Although the company continues to keep its eyes peeled for possible acquisition targets, he said many small logistics players are holding out for “astronomical valuations”.

Meanwhile, an anonymous industry player questions the sustainability of on-demand logistics start-ups which not only continue to make losses but are, in some cases, cash flow-negative.

“How long are investors going to continue pumping money into them?” he asked, noting that although these companies are modelled after ride-sharing services Uber and Grab, they seem not to have perfected the synchronisation of their fleet with their parcels.

“When it comes to freight, size matters,” the industry player said, adding that these start-ups have not fully synchronised the size of their parcels with the vehicles used to transport them.