Challenges ahead for Tasco, but manageable

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Tasco Bhd
(Feb 12, RM3.04)
Maintain buy call with a lower target price (TP) of RM3.43:
We continue to maintain our “buy” call on Tasco with a lower TP of RM3.43 (from RM3.90) premised on 10.5 times forecast financial year 2016 (FY16F) price-earnings ratio (PER).

While the near-term outlook remains challenging, we still foresee Tasco recording earnings growth given its warehouse expansion. We also like its decent dividend yields.

Tasco reported a net profit for the cumulative nine-month period in financial year 2015 ending March (9MFY15) of RM25.1 million on RM380.1 million in revenue.

As its earnings came in only at 73% of our full-year estimates, we deem the numbers below expectation as we anticipate the coming fourth quarter (4Q) of FY15 to be seasonally weaker due to the festive season.

The earnings shortfall was mostly from its contract logistics division due to lower cargo turnover at its warehouses.

In the midst of lower oil prices, Tasco unfortunately will not be able to reap the full benefit of lower pump prices as these savings will be passed on to customers.

However, thanks to the lower fuel prices, its trucking division has posted its first profit (profit before tax [PBT] of RM260,000) in 3QFY15.

The PBT margin of 1.3% for this division during this period was still lower than the 2.9% achieved in 3QFY14, though.

Tasco’s growth continues to be driven by its warehouse business. The recent operations commencement of its new warehouse at Port of Tanjung Pelepas (PTP) last month will be the earnings driver for FY16.

The warehouse is a 2-storey unit with a 210,000 sq ft lettable area and will take advantage of the growing warehousing demand from neighbouring Singapore.

Warehousing space at PTP has been in high demand due to a lack of affordable space rentals in Singapore and the tendency of manufacturers there opting to relocate their activities to Johor where labour and operational costs are relatively lower.

We trim FY15 earnings by 11.6%  and FY16 by 10.6% on lower revenue and margins from air freight and contract logistics. — RHB Research, Feb 12

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This article first appeared in The Edge Financial Daily, on February 13, 2015.