Logistics Sector
Maintain overweight: We remain “overweight” on the logistics sector. GD Express Carrier Bhd (GDEX), still our top pick given its growth potential in e-commerce activities, may book its strongest earnings growth (37.4% year-on-year [y-o-y]) in financial year 2016 (FY16) when pitted against the other logistics counters in our coverage. Moving into 2016, earnings could be promising for export- and import-oriented players like Tasco Bhd and Freight Management Holdings Bhd, on which we also have “buy” recommendations. 

Courier players such as GDEX (“buy”, target price [TP]: RM1.98) and Pos Malaysia Bhd’s (“buy”, TP: RM5.44) Pos Laju display promising growth in the logistics sector. The rise of online retail shopping — from business-to-consumer and customer-to-consumer businesses — has driven the burgeoning courier delivery industry. Another driving force that could propel the growth of the industry is if traditional brick and mortar retail outlets start to expand their distribution channels into online platforms. 

We note the emergence of new online shopping websites. These entities help to enable fierce competition in the market, not only among the online peers but also for traditional brick and mortar players. While rising competition among online shopping players could put pressure on costs and consequently squeeze courier service providers’ margins, it could also lead to greater volume for couriers and encourage more players to enter the fray. 

China could make a bigger entry into Asean eventually. Various Chinese government initiatives and incentives for small and medium enterprises to tie up with e-commerce providers for cross-border transactions could eventually expand into Asean. This  could drive up demand for courier services  for last-mile deliveries.   While the moderating economic landscape poses near-term challenges for export-import trade-oriented logistics players such as Tasco (“buy”, TP: RM4.76) and Freight Management (“buy”, TP: RM1.87), in the mid to longer term, we remain optimistic on the earnings outlook for these two companies, and estimate earnings to grow 19% and 17% y-o-y respectively in FY16, on the back of their ongoing expansion plans.

We maintain our “overweight” stance on the logistics sector, and keep GDEX as our top pick given the growth potential in e-commerce. We expect GDEX to book the strongest earnings growth (37.4%) in FY16,  against the rest of the logistics counters in our coverage universe. Given its expected earnings growth, superior returns on equity and strong free cash flow growth trajectory, we deem its high price-earnings ratio as reasonable. — RHB Research Institute, July 14

This article first appeared in The Edge Financial Daily, on July 15, 2015.