Freight Management -
Target Price: MYR2.00
Freight Management (FMH) kick-started FY14 with a commendable net profit of MYR5.3m (+9.7% y-o-y), which was within our and consensus estimates. All its business divisions reported earnings growth except the tugs & barges segment. The company’s expansion plans are making good progress. Maintain BUY call, with FV revised upward to MYR2.00 from MYR1.68.
Results in line. FMH’s 1QFY14 net profit of MYR5.3m (+9.7% y-o-y) was within our and consensus estimates. Earnings rose on the back of strong growth in the sea freight, 3PL/warehousing, land freight and haulage segments. However, the escalation in staff cost and higher taxation due to normalization of its tax rate partially offset the company’s strong topline growth.
Overview of performance. Y-o-y, all of FMH’s business segments saw positive earnings growth except tugs & barges, which was affected by unscheduled repairs. The significant improvement in total volume handled at the sea freight and land freight segments boosted revenue as well as gross profit margin.
Expansion plans make good progress. The tugs & barges to be built via a JV with SES is on track and scheduled to come on stream by 3Q or 4QFY14. Meanwhile, construction has begun on FMH’s new 120k sq ft warehouse, which is expected to be completed by end-2014. On the regional expansion front, it has formed a JV with Filipino partners to expand its integrated logistics business to the Philippines.
Risks. These are: i) a slowdown in the global and local economy, ii) intensifying competition in the sector, as well as iii) investment risks in new markets.
Maintain BUY, FV MYR2.00. We continue to like FMH’s solid business model and strong balance sheet as well as management’s asset light business strategy. We have incorporated the company’s latest audited figures and made some slight adjustments. Maintain BUY on FMH, but upgrade the stock’s FV to MYR2.00 (from MYR1.68), based on a 13.2x (from 11.0x) FY14F P/E, which is the peer average.
1QFY14 Results Highlights
Overall results in line. FMH reported satisfactory results for 1QFY14, with a net profit of MYR5.3m (+9.7% y-o-), spurred by strong growth in sea freight, 3PL/warehousing, land freight and haulage. However, increasing staff cost and higher taxation due to normalization of its tax rate offset the strong growth in topline. Overall, as FMH’s 1QFY14 numbers met 21% of our full-year forecast, we deem these in line with our and consensus estimates.
Strong growth in sea freight. Sea freight continued to be the group’s main revenue and earnings contributor, accounting for 53.9% and 57.5% of total revenue and gross profit respectively. The segment’s revenue and gross profit improved by 9.9% and 23.6% y-o-y, mainly due to strong volume growth from both sea freight less-than-acontainer-load (LCL) volume (+28.7% y-o-y) and full-container-load (FCL) volume (+16.5% y-o-y). The strong improvement also helped to lift its gross profit margin by 3.3ppts y-o-y.
Land freight segment chalks up higher volume. FMH’s land freight side remained stable , putting up a strong showing with revenue and gross profit surging 107.6% yo-y and +155.8% y-o-y respectively, mainly boosted by higher import and export volume. Meanwhile, import volume was spurred by recent 3rd party logistics (3PL) contract.
Air freight margin widens. Although revenue dipped 3.8% y-o-y, gross profit improved by 16.3% y-o-y, which we believe was due to higher volume achieved, which then helped the company reach higher economies of scale. We understand that as FMH is revamping the agency structure of its air freight operation, we may see some volatility in this division over the next few quarters.
Tugs & barges reports weak performance. For 1QFY14, the tugs & barges segment reported that revenue and gross profit fell 17.4% y-o-y and 62.4% y-o-y respectively. As guided by FMH’s management, this was mainly due to vessels downtime arising from maintenance and unscheduled repairs (one of its tug boats was grounded on the beach due to bad weather). Nonetheless, there were no major losses and management is still positive on the outlook for this division. A new set of tugs & barges will be ready in 2QFY14 and accordingly lift its fleet to seven sets.
Management also said the tugs & barges to be built with its JV partner, Scomi Energy Services (SES, NR), is on track and expected to come on stream by 3Q or 4QFY14.
Warehousing treads cautiously. FMH’s 3PL/Warehousing business is growing due to existing customers but the profit margin dipped 14.4ppts y-o-y, mainly due to a less favorable product/service mix. Construction has started on its 120k sq ft new warehouse in Klang adjacent to the existing one and scheduled to complete by the last quarter of CY2014 (2QFY15). FMH is sticking to its asset light business model and does not want to over-expand the warehousing business. It would also continue to package its 3PL/warehousing business as a total service package to its customers.
How other operating divisions fared. The performance of FMH’s other divisions wee mixed, but this will not severely affect the Group. Although rail freight remained profitable, its contribution was insignificant and management may take a relook at this business model. That said, any decision to cease operation will not make a material negative impact on the Group. Meanwhile, the customs brokerage segment was profitable, but its contributions are insignificant as it continues to provide support to FMH’s clients. Lastly, the haulage division also remains profitable and brings in stable margins.
Making good progress in venture to Philippines. FMH had recently expanded into the Philippines by forming a 50:50 JV company with Filipino parties that will provide point to point integrated logistics services to and from the Philippines. It also entered into a business sale agreement to procure USD350k, business intellectual property, goodwill, business records and the transfer of employees to kickstart the Philippine subsidiary.
Updating model and lifting FV. We have updated FMH’s latest audited financials into our valuation model and increased our earnings forecast s slightly to MYR25m/MYR30m from MYR24.8m/MYR29.8m. as FMH is confident that the group would chalk up 10-15% y-o-y growth in FY14 on the back of improving fundamentals, we believe it will meet our full-year forecast. We also lifted our valuation parameter to 13.2x FY14 P/E (from 11.0x), which is in line with the industry average. This bumps up our FV to MYR2.00 (from MYR1.68). Maintain BUY