MIDF Research forecasts three-year profit CAGR of 20 per cent for Tasco
KUCHING: The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) has forecasted a three-year profit compouind annual growth rate (CAGR) of 20 per cent for Tasco Bhd (Tasco) on a better outlook.
MIDF Research revealed in a initiating coverage that through the announced acquisitions of Gold Cold and MILS, Tasco would leapfrog the group’s rivals to become a joint-market leader in cold chain logistics, with a total warehouse pallet count of 36,100.
“Combined, the acquisitions totalling RM332 million represents approximately70percentof Tasco’s current market capitalisation, reflecting the company’s strong desire to grow,” it said.
On the research arm’s threeyear profit CAGR of 20.2 per cent forecast, MIDF Research explained that this was supported by international business growth, domestic segment and earnings accretive acquisitions.
According to MIDF Research’s analysis, Tasco’s international revenue correlates with Malaysia’s gross external trade growth.
“In fact, the pace of growth for its international revenue segment has historically exceeded that of Malaysia’s external trade growth,” the research arm said.
MIDF Research noted that in the first quarter of 2017, gross external trade growth grew 24.3 per cent year on year ( y- o- y) bolstered by improved trading volume with China and within the Asean region.
The strong growth in external trade growth partly explained the research arm’s optimism on the prospects of Tasco’s international freight forwarding division.
MIDF Research forecasted Tasco’s international revenue to grow by 11 per cent y-o-y and five per cent y-o-y for financial year 2018 (FY18) and FY19 respectively.
This was underpinned by Bank Negara Malaysia’s (BNM) forecasted growth in gross exports of 5.5 per cent and gross imports of 6.4 per cent y-o-y, Ministry of International Trade and Industry’s (MITI) trade growth forecast of five per cent y-o-y and the research arm’s forecast of 8.5 per cent y-o-y.
Meanwhile, the research arm’s growth forecast coincided with Yusen Logistics’ revenue growth forecast for the South Asia and Oceania Region of 11 per cent.
On the domestic division, MIDF Research highlighted that revenue has been forecasted to expand 41 per cent y-o-y in FY18 with the full consolidation of the Gold Cold and MILS.
Without the contribution from the acquired companies, the research arm forecasted the domestic division’s topline to grow by 9.9 per cent y-o-y and 5.7 per cent y-o-y for FY18 and FY19 respectively.
MIDF Research’s forecast for the domestic division was mainly driven by the contract logistics division, which it forecasted to expand by 12.5 per cent y-o-y in FY18 premised on improving domestic economic activity and an increase in third party logistics demand.
The research arm expected Tasco’s customers which consist of electrical and electronics (E&E), consumer retail, fast- moving consumer goods (FMCG), food and beverage (F&B) and commodities sectors to perform better in current year 2017 (CY17).
MIDF Research also expected the acquisitions to be earnings accretive, despite the premium paid for full control of both Gold Cold and MILS.
The research arm noted that while the valuations in terms of price earnings ( PE) multiples of both acquisitions were above Tasco’s forward-FY17 PE of 15fold, the all-cash nature of the acquisition would not create a dilution in earnings per share (EPS) for Tasco.
“On the contrary, we estimate incremental EPS as a result of the acquisitions as we view them as clear-cut extensions to Tasco’s core domestic logistics business with minimal product overlap or staff redundancy,” it said.
Overall, MIDF Research expected an uptick in profit margins in FY18 onwards as Tasco expands the company’s cold chain logistics business which are more lucrative, margin wise.
With the aggressive acquisitions of Gold Cold and MILS, MIDF Research estimated that Tasco’s net gearing will rise to 0.74-fold in FY17 before trending down from FY18 onwards.
Apart from Tasco’s large capital outlay for the group’s acquisitions, the research arm said that capital expenditure ( capex) would normalise to the RM20 million to RM25 million range from FY18 onwards for organic expansion of its warehouses and vehicle fleet.
All in, MIDF Research initiated coverage on Tasco with a ‘buy’ recommendation and target price of RM2.91 per share.
The target price was pegged to a forward FY18 price-to-earnings ratio of 12-fold, which was slightly below the average price earnings PE multiple for the group’s peers.
The research arm forecasted a 38 per cent dividend payout ratio, potentially translating into decent dividend yields of 3.8 to 4.2 per cent for FY18 and FY19.
“We note that the sector has seen interest piqued since 2016 with several logistics companies being targeted for acquisitions, as logistics companies are seen as a direct proxy to economic growth and a beneficiary of increased e- commerce activity,” MIDF Research said.