Tasco plans RM400 mil capex for capacity expansion

This article first appeared in The Edge Malaysia Weekly, on October 5, 2020 - October 11, 2020.
From left: Lim, Tan, Check Poh,Wan Kai and executive director NorihikoYamada. Tasco plans to enhance its logistics capabilities to take the group to the next level. (Photo by Shahrin Yahya/The Edge)

From left: Lim, Tan, Check Poh,Wan Kai and executive director NorihikoYamada. Tasco plans to enhance its logistics capabilities to take the group to the next level. (Photo by Shahrin Yahya/The Edge)

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TASCO Bhd is all set to take its business to the next level. The total logistics solution provider will spend RM400 million over the next five years to support its long-term logistics capacity needs.

Executive chairman and substantial shareholder Lee Check Poh says the capital expenditure will be used for expansion of its warehouses.

“We currently lease about 350,000 sq ft of warehouse space. We have been paying monthly gross rents of RM1.50 to RM1.70 per sq ft for the space. However, by owning our own warehouse space, our cost will be just 70 sen (per sq ft per month), which works out to about RM350,000 in savings,” Check Poh, who had a 9.83% stake in the company as at July 30, tells The Edge in an interview.

Tasco also expects to pay less income tax as a result of a tax incentive granted by the Malaysian Investment Development Authority recently. Under the integrated logistics services incentive, Tasco enjoys income tax exemption via investment tax allowance (ITA) of 60% on qualifying capex incurred within five years. The ITA can be offset against 70% of statutory income for each year of assessment.

Deputy group CEO Tan Kim Yong says based on the company’s RM400 million capex plan, the savings from lower tax payments are estimated to be about RM60 million for six to seven financial years.


“The group is required to commit investment in capex of at least RM240 million over the next five years, but we intend to spend more than that. This capex spend is in line with our plans to enhance our logistics capabilities as we take the group to the next level,” he adds.

Tasco, which has seen profits slide in the past four financial years, expects to resume its growth trajectory in financial year ending March 31, 2021 (FY2021), as investments made three years ago start to bear fruit.

The group had ventured into the cold chain logistics business in 2017 via the acquisitions of Gold Cold Transport Sdn Bhd and MILS Cold Chain Logistics Sdn Bhd. It also diversified into the convenience retail logistics business in the same year through a joint venture (JV) with Yee Lee Corp Bhd.

“The investments made in the past two to three years had resulted in higher depreciation and interest costs (due to higher borrowings to fund the acquisitions), as well as expenses as we underwent a steep learning curve, which affected our profits,” says Andy Lee Wan Kai, who was the company’s chief business development officer before becoming group CEO in April. Wan Kai is also Check Poh’s son.

But since January, the group has been gathering the benefits of its past investments. “Now that the investments have stabilised, leading to improved operational efficiency, we will begin to reap the fruits of our labour in FY2021,” Wan Kai says.

He is confident that profits for FY2021 will return to the levels achieved in FY2016, when Tasco reported a pre-tax profit of RM43.98 million and a net profit of RM30.61 million.

Tasco posted a net loss of RM377,000 in the January-March quarter of 2020 (4QFY2020) versus a net profit of RM2.14 million a year ago. But the group bounced back strongly in 1QFY2021, reporting a net profit of RM2.64 million, or double year on year.

On the impact of the Covid-19 pandemic, Wan Kai says while the group’s domestic business was affected in 1QFY2021 owing to the shutdown of all plants and offices following the government-imposed lockdown to contain the spread of the virus, this was offset by a pickup in its air freight forwarding business.

“We incurred a loss in April, but managed to recover and break even in May. Thus, the 1QFY2021 results were mainly reflective of our performance in June. So, this (financial) year is not a 12-month fiscal year budget but a 10-month budget because the April and May performance was something completely unpredictable,” he says.

Tasco’s shares have gained 67% to close at RM1.42 on Sept 30 since the release of its 1QFY2021 results on Aug 26, giving the company a market capitalisation of RM284 million.

Wan Kai attributes the group’s success in weathering the pandemic to three factors. The first is its diversified revenue streams.

“Some logistics companies only specialise in warehousing or the handling of air or ocean freight. For Tasco, we have a variety of services [which provides an offset or a buffer in the event of a fall in certain businesses],” he notes.

The second is its move into niche market segments, that is, cold chain logistics and food retail logistics. This leads to client stickiness and long-standing relationships. “It is not something that customers can just walk away from,” says Wan Kai.

The third is the investments that Tasco made over the past 10 years. Wan Kai cites the investment cost of its logistics centre in Shah Alam, Selangor. “We bought the property for RM40 million or RM40 per sq ft 10 years ago. Today, this piece of land is worth RM160 per sq ft.

“Another example is our Westports logistics centre in Pulau Indah, Selangor. We bought the land for about RM140 million or RM35 per sq ft (in 2017). The current market value is over RM70 per sq ft.

“Of course, we do not intend to sell any of these properties, but the land price has an indirect impact on the storage vendor cost. As land becomes more expensive, revenue  from these warehousing facilities will also increase,” he says.

Check Poh concurs. “Our latest net tangible asset (NTA, which was RM1.77 per share as at June 30, 2020) is before adjusting for property revaluations,” he says, noting that a revaluation could bump up Tasco’s NTA to RM5 to RM6. As at last Wednesday’s closing, Tasco was trading at a 20% discount to its NTA.

Keeping eyes peeled for M&A

Wan Kai says the company is constantly on the lookout for merger and acquisition (M&A) opportunities. “We have not ventured into the e-commerce space. So, we are always looking for acquisition targets in this segment. We are also open to partnering with companies in the last-mile logistics market. In fact, we will be working with some partners in this area,” he says, but declines to elaborate.

He points to Tasco’s past history of partnerships, including with Japan’s Yusen Logistics Co Ltd for its air and ocean freight businesses, and with Japan Overseas Infrastructure Investment Corp for Transport & Urban Development (JOIN) in its cold supply chain business. “If you look at our trading business (which provides inventory management, warehousing and logistics services to Shell petrol retail outlets), we have a partner in Yee Lee,” he adds.

The group is also keen to work with other companies to venture into the healthcare logistics market.

“In the healthcare area, we have a few candidates that we would like to talk to. We are not into the manufacturing aspect. We will be providing logistics solutions to healthcare players,” says Wan Kai. “We are still exploring with the players in the market. It is something we believe we should move into together with other people rather than doing it alone.”

Tasco executive director Freddie Lim Jew Kiat, who is also group CEO of Tasco Yusen Gold Cold Sdn Bhd, sees a big opportunity for its cold chain logistics division to venture into the healthcare market.

“When it comes to healthcare, some of the drugs need to be stored and delivered in a temperature-controlled manner. So, that augurs well for our cold chain business. The opportunity is there because there are not many cold chain companies in Malaysia. Also, most of them are focused on the domestic market and don’t have international connections like Tasco,” he says.

The group has already registered its interest with the Ministry of Health to become a potential vaccine storage provider for Covid-19 shots. “They have taken note of our capabilities. We are waiting to see what’s next,” says Lim.

Nevertheless, Check Poh says Tasco will not rush into any M&A. “We will look for stable and profitable companies. We will not simply buy.”

As at June 30, 2020, Tasco had a cash balance of RM101.21 million while borrowings totalled RM284.44 million, translating into a net gearing of 0.42 times.

Contract logistics to drive profit growth

Tasco is expecting the air and ocean freight businesses under its international business solutions segment to drive revenue growth in FY2021.

Wan Kai says while the volume of air and ocean freight has dropped owing to the pandemic, the surge in freight rates have more than mitigated the lower volume.

“Still, our focus is on our bottom line. This is where our contract logistics business will shine. We believe there is still a lot of room for us to optimise the utilisation of our land in Shah Alam, Westports and elsewhere that we invested in earlier,” he says.

Its domestic business solution segment, under which the contract logistics and cold chain businesses are parked, contributed 76% to the group’s pre-tax profit of RM5.23 million in 1QFY2021.

In a Sept 14 report, JF Apex Securities analyst Lee Chung Cheng expects Tasco to deliver a net profit of RM31.7 million in FY2021, up 255.6% y-o-y, mainly driven by stronger performance in its cold chain logistics business, hikes in ocean and air freight rates, reduced finance costs, drastic cost rationalisation initiated by the management since the Movement Control Order, lower effective tax rate because of the ITA entitlement and its venture into the niche and defensive food retail business segment.

He has upgraded the stock to a “buy” from a “hold” previously, with a target price of RM2.06.

 

 

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