Trade Wise: More upside to GDEX?

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This article first appeared in Capital, The Edge Malaysia Weekly, on January 9 - 15, 2017.


GD Express Carrier Bhd (GDEX) may be trading at the top end of its 52-week range and above its 52-week average price but analysts seem to believe that there is still upside to the local logistics company’s shares.

According to Bloomberg, four out of five analysts covering GDEX have a “buy” recommendation on the stock. The other has a “hold” call. The 12-month target price is RM1.97, which is a 15.2% upside to GDEX’s closing price last Thursday of RM1.71.

The stock is currently trading just seven sen below its 52-week closing high of RM1.78, which it hit on Jan 13 last year. Its 52-week closing low was RM1.46 on May 3 last year. Its 52-week average price is RM1.619.

Why are the analysts so enthusiastic about the stock now?

One common theme they have is the merger-and-acquisition story.

Kenanga Research, which initiated coverage on the stock recently, says it believes regional expansion through acquisitions is “very likely” and will serve as a major rerating catalyst.

It adds that the funds of over RM200 million raised from the private placement exercise last year have given GDEX a “sizeable war chest for inorganic regional growth”.

“Furthermore, with GDEX’s strong financials and asset-light business model, there is no need to dig into the cash raised to fund any internal capex or organic expansions, as strong internal cash flows would be more than sufficient. Thus, with the entire war chest solely for inorganic growth, we reckon it may end up with multiple acquisitions, with Indonesia the most likely target country for expansion,” it says in a Dec 27, 2016, report.

“The company has already launched the first of many strikes, namely a 30% acquisition of Web Bytes for RM5.5 million and subscription of PT Satria Antaran Prima’s convertible bonds of about RM10 million. Moving forward, as we foresee more acquisitions to be made, we believe that any major M&A would either complement existing operational efficiencies or bring about a new stream of income altogether.”

The research house believes that GDEX will most likely seek to acquire companies that can improve its operational flow, such as IT or logistics system-related firms, or other last-mile delivery firms in Asean, and give the company a new stream of earnings.

Kenanga Research has an “outperform” call on the stock with a target price of RM1.97.

MIDF Research, which also initiated coverage on GDEX last month, says, “We believe more acquisitions could be on the cards for express delivery players, integrated logistics businesses or warehouse/industrial land.”

It adds that GDEX has a war chest of RM282 million and is prepared to inject this cash into value enhancing and synergistic assets.

MIDF Research has a “buy” call on the stock and a target price of RM2.06.

Foreign research house Nomura Research also has a “buy” call, but its target price is higher at RM2.21. It says in a Jan 4 report that it believes “GDEX could emerge as a formidable Asean logistics player on regional expansion moves”.


Japan’s Yamato to up its stake further?

Apart from the inorganic M&A angle, there is also the possibility of GDEX’s Japanese substantial shareholder raising its stake in the Malaysian company.

In an interview last September, Yamato Holdings Co Ltd president Masaki Yamauchi said the Japanese group is considering making GDEX its subsidiary.

In a Bursa Malaysia announcement following an article on the interview, GDEX said, “With regard to the report on Yamato Holdings Co Ltd (the holding company of Yamato Asia Pte Ltd) considering taking a majority stake in GDEX and making the company its subsidiary, the board of directors of GDEX wishes to clarify that GDEX is not aware of such an arrangement.

“Nonetheless, GDEX and Yamato group have been maintaining a good working relationship since Yamato Asia emerged as the second-largest shareholder of GDEX.”

The Edge wrote to Yamato more than three weeks ago to follow up on the matter, asking if Yamato has started the process to make GDEX a subsidiary (for example, hiring investment bankers to look into it or initiating talks).

The Japanese company had yet to respond at press time.

On Feb 10 last year, GDEX completed the private placement of its shares of up to 10% of  issued and paid-up share capital with Yamato Asia, paving the way for a cross-border partnership between the two and laying the groundwork for a regional push.

GDEX raised RM217.31 million from the exercise and used it as working capital and for capital expenditure and business development.

GDEX and Yamato also entered into a business collaboration and capital alliance agreement to improve efficiencies in the business.

Two days after the completion of the placement exercise, Yamato increased its stake in GDEX to 22.8% and became its second-largest shareholder.

Yamato also manages Yamato Transport Co Ltd, the No 1 parcel delivery company in Japan with the largest market share there. In FY2015, Yamato Transport posted a net income of about RM1.4 billion on revenue of RM51.9 billion.

MIDF Research says it believes business collaborations, such as channelling parcel volumes, cross-border trucking and fresh produce deliveries, could be established between GDEX and Yamato moving forward.

“It is worth noting that the world’s largest e-commerce player, Alibaba, holds an indirect stake in GDEX via SingPost (Singapore Post Ltd), thus giving GDEX an advantage over its competitors when bidding for business. Moreover, Alibaba has bought over Lazada, one of GDEX’s largest customers,” it adds in a Dec 13, 2016, report.

SingPost has an 11.2% stake in GDEX while the latter’s founder and group CEO, Teong Teck Lean, holds 25.37%.

The story of Teong’s venture into GDEX is an inspiring one.

When he bought into the company in 2000, it was loss-making and many did not give his plans for the company a chance. “I don’t blame them as I have not run a business before,” Teong told The Edge in an exclusive interview in 2007.

When Teong bought a 70% stake in GDEX, the company was in the red. The trained engineer turned it around in two years and listed it on Mesdaq in May 2005 at 30 sen a share. Today, the share price has risen fivefold to RM1.71.

GDEX transferred its listing to the Main Market in 2013.

Teong and his team have been growing GDEX steadily and today, Kenanga Research foresees GDEX’s net profit growing at a three-year compound annual growth rate (CAGR) of 22.3%, riding on the booming e-commerce industry.

“On the back of the healthy growth of the e-commerce-related express delivery and logistics sector, coupled with resilience in GDEX’s B2B express delivery, we project its core net profit to grow 17% to 29% in the next three years, implying a CAGR of 31.9% from FY2011 to FY2019. We believe GDEX will be a major beneficiary of the booming e-commerce sector in Malaysia and Asean as consumers begin embracing online shopping. We deem our projections to be fairly conservative, given that the company has recorded core net profit growth of 24% to 57% in the past five years,” it says.

From a net profit of RM7 million in FY2011 ended June 30, GDEX’s earnings have risen progressively over the past five years to RM34.4 million in FY2016, driven by strong e-commerce growth.

For the financial year ended June 30, 2016, GDEX’s turnover rose 11.7% to RM219.8 million from a year ago. Net profit increased 22% to RM34.4 million.

The company declared a first and final single-tier dividend of one sen per share for FY2016, which is equivalent to a dividend payout ratio of 40.2%.