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This article first appeared in The Edge Financial Daily on August 20, 2018

Tasco Bhd
(Aug 17, RM1.70)
Maintain buy with a lower target price of RM1.96:
Tasco Bhd reported a net profit of RM5.2 million for its first quarter of financial year 2019 (1QFY19) ended June 30, 2018, which inched up 1.3% quarter-on-quarter (q-o-q) but slid 27.3% year-on-year (y-o-y) with revenue growth of 7.2% q-o-q and 15.7% y-o-y. The better q-o-q performance was due to the better result by the International Business Solutions (IBS) and lower corporate costs that offset lacklustre earnings from the Domestic Business Solutions (DBS). However, unfavourable y-o-y performance was bogged down by lower earnings by the IBS and higher corporate costs despite a better performance by the DBS. Tasco’s 1QFY19 net profit was below our and consensus expectations by matching 13.6% and 13.1% of full-year earnings estimates respectively. The uninspiring performance was mainly due to a loss incurred by the Ocean Freight Forwarding (OFF) division and the preoperating expenses for newly secured consumer retailing business under the Contract Logistics (CL) division.

 

Meanwhile, the Air Freight Forwarding division recorded a better performance in view of higher margin. Overall, IBS’ 1QFY19 profit before tax (PBT) was up 20.1% q-o-q but down 56.5% y-o-y to RM1.7 million. Lower revenue by OFF was due to shipments dropped by electronic & electrical customers. CL division’s revenue continued growth but PBT was bogged down by preoperating expenses in 1QFY19. Revenue grew 15.8% q-o-q and 26.3% y-o-y to RM79.8 million but PBT tumbled 54.2% q-o-q and 26.3% y-o-y to RM5.1 million. Cold Supply Chain (CSC) division recorded a revenue of RM21.2 million, which inched down 3.5% q-o-q in 1QFY19. Similarly, PBT edged down 4.2% q-o-q to RM3.1 million. Trucking division registered a PBT of RM700,000 in 1QFY19 compared with RM400,000 in 4QFY18 and a loss of RM700,000 in 1QFY18. This was attributable to the continuous cost-cutting measures undertaken by Tasco. As such, DBS posted a higher revenue of RM121.5 million (+11.7% q-o-q and 41.3% y-o-y) with a PBT of RM8.9 million (-39.6% q-o-q and +43.6% y-o-y).

Looking forward, we envisage Tasco fully recognising its CSC business segment in FY19 with an estimated revenue of about RM100 million. As such, we believe the CSC division is able to contribute a PBT of RM10 million to RM12 million to Tasco in FY19. We understand that Tasco is in the midst of applying for an investment tax allowance (ITA). If Tasco is able to secure the approval, we foresee tax savings of RM15 million to RM20 million, which would probably be recognised as early as this financial year. To recap, Tasco recognised such tax allowance in FY11 with tax savings of RM3.9 million, which translated into an effective tax rate of 14.6% (versus statutory tax rate of 25%). In addition, we also understand that total ITA claimed by Tasco between 2003 and 2007 was RM21 million.

Looking forward, we believe Tasco could sustain its growth trajectory, backed by resilient gross domestic product growth in Malaysia (our in-house 2018 forecast: 5.3%) and a projected global growth of 3.9% by the International Monetary Fund for 2018.  We keep our earnings forecasts unchanged for FY19 and FY20 as we believe Tasco’s net profit is able to pick up in coming quarters.

Overall, we are sanguine about its future growth following its venture into cold chain market. With this, Tasco is able to generate synergy across all of its divisions and provide integrated logistics services for its clients. Furthermore, the soon-to-be-launched trading business (by YLTC Sdn Bhd, a 60:40 joint venture between Yee Lee Corp Bhd and Tasco) will create further synergy to its existing businesses. — JF Apex Securities Bhd, Aug 17

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