30 JEWELS 2013 Edition
An Undervalued Gem
•Focusing on its most profitable business segment
•Making further inroads into the O&G sector
•Solid foundation with a proven business model
•BUY, with MYR1.71 FV, based on a 11x FY14 P/E
Freight Management (FMH) is an integrated logistics provider. The company’s asset-light business strategy has enabled it to outperform its peers and sustain an earnings streak of more than nine years.
Outperforming peers. We like FMH for its asset-light business model, which has helped it to outperform its peers during the challenging 1QCY13. While we expect earnings to grow at an unexciting 7.3% this year, we believe the company is poised for stronger growth next year, in line with the global economic recovery.
Positive trend continues. Since FY03, FMH has recorded commendable nine-year revenue and net profit CAGR of 12.7% and 16.9% respectively. While FY13 earnings growth is expected to be slow, at 7.3% y-o-y, amid a tepid macro outlook, we believe the economy may start to pick up in FY14, which could potentially benefit freight forwarders like FMH. All in, we are positive on the company’s future development.
Strengthening its foundation. FMH is well-known for its business model of focusing on the Less-Than-A-Container-Load (LCL) segment, which fetches higher profit margins. Besides its core business, the company is also expanding its tug & barge segment, which has contributed considerably to Group revenue and earnings. FMH has recently signed a memorandum of understanding (MOU) with Scomi Energy Services to further expand into the tug & barge segment. We view this development positively as it will allow FMH to tap further into the lucrative oil and gas (O&G) sector.
Asset-light business model. Although its third party logistics (3PL) /warehousing business is seeing stronger demand, FMH is taking the expansion route more cautiously by offering warehousing as part of an integrated package. The company’s preference is still the core LCL business as it integrates other 3PL services. By adopting an asset-light strategy, FMH is avoiding the pressure of constantly scouting for clients to fill up its warehouse space as well as the risk of being saddled with high rental payments when the market is weak and the occupancy rate low.
Company Report Card
Latest results. FMH managed to post a 5.3% y-o-y growth in 3QFY13 net income, outperforming its peers despite 3QFY13 being a seasonally weaker quarter as trade activities typically slow down during the Chinese New Year.
Balance sheet / Cashflow. FMH has a solid balance sheet and a net cash position.
ROE. In tandem with our expectation of a slow FY13 earnings growth, we expect FY13 ROE to be around 16.9%, a slight decline y-o-y.
Dividend. FMH has maintained a dividend payout ratio of about 30% and we believe it would maintain the ratio moving forward.
Management. At the helm are managing director Mr Yang Heng Lam and his fellow co-founders, the husband and wife team of Mr Chew Chong Keat and Ms Gan Siew Yong. FMH undoubtedly has a solid management line-up with vast experience in freight forwarding.
We have a BUY recommendation on FMH with a MYR1.71 valuation, derived from a 11x FY14F P/E. We like the company for its solid foundation and business model, coupled with expected stronger earnings growth in FY14F, in tandem with our view that the economy may pick up from FY14 onwards.