This article first appeared in The Edge Financial Daily on April 2, 2019

Tasco Bhd
(April 1 RM1.65)
Upgrade to buy (previously neutral) with an upgraded target price (TP) of RM2.01 (previously RM1.40): Our TP values Tasco at 18.8 times forecast financial year 2020 (FY20 forecast [f]), (March) price earnings (+0.75 standard deviation [SD]) and 1.03 times FY20f price-to-book value (P/BV) (+0.22SD).

The higher TP is due to better earnings forecasts which are in line with lower interest cost after the RM125 million investment from Japan Overseas Infrastructure Investment Corp for Transport & Urban Development (JOIN).

We also roll over our discounted cash flow (DCF) valuation to begin from FY20F.

JOIN is investing RM125 million in Tasco Yusen Gold Cold (TYGC) for a 30% stake, while Tasco’s stake will be reduced to 70% from 100%.

TYGC provides fully integrated cold chain and convenience retail logistics services. JOIN is a government-private-sponsored fund in Japan that focuses on overseas infrastructure development.

Japan’s minister of finance owns 87.19% of JOIN, which has invested in Indonesia (January 2017), Thailand (December 2018) and Myanmar (March 2019) for projects related to the logistics sector.

Net gearing has been reduced to 17% from 43%. Tasco’s balance sheet will improve significantly, as RM97 million of the proceeds will be used to pare down borrowings.

We have raised FY20F-21F core net profit by 34-70%.

Most of the earnings estimate increase is expected to come from interest savings annually of around RM4.6 million. We also expect greater synergies from JOIN’s investment in the cold supply chain division, through better technologies and higher business volume from other countries. However, FY19F earnings are unchanged at RM13 million, as Tasco’s financial year ends on March 31.

We believe JOIN’s investment is a game changer for Tasco. Firstly, we expect higher business from Indonesia, Thailand and Myanmar due to JOIN’s established network. Secondly, we think that there is great synergy to be realised due to JOIN’s knowledge and technology in cold chain logistics operation. Lastly, the investment has removed one of the major concerns regarding Tasco — its high net gearing.

We have raised to “buy” with a new RM2.01 DCF TP, which values it at 18.8 times FY20F P/E (+0.75SD valuation) and 1.03 times FY20f P/BV (+0.22SD valuation).

The higher TP is due to better forecast earnings and valuation rollover. We believe the premium valuation is justified due to the strong 65% earnings growth for FY20f and high synergy to be realised in its cold supply chain division.

The key risks to our view include weaker-than-expected performance from the cold supply chain division or other divisions (air freight and ocean freight forwarding, contract logistics and trucking). — RHB Research Institute, April 1