Tasco is actively being invited to participate in more regi onal logistics contracts, which should propel its earnings growth further to an estimated 3-year CAGR of 17.4%. Maintain BUY with a higher TP of MYR4.76 (26% upside, 13x FY16F EPS), after raising FY15-17 earnings forecasts by 7-12%. We like Tasco for its improving ROEs of 11-13%, solid net cash position and strong earnings CAGR.

Full house. Tasco’s new Port of Tanjung Pelepas (PTP) 2-storey warehouse measuring 210,000 sqf commenced operations in late Jan2015, and we understand that utilisation space is currently full. We gather that demand at PTP is overwhelming, putting pressure on Tascoto seek more warehouse space by leasing from third parties in the interim.

Bidding for new jobs. Tasco has a client base of 80 companies which use its warehouses throughout Malaysia. Its managing director, Freddie Lim was quoted in The Edge Weekly that it is actively bidding for new jobs – receiving as many as 80-100 invitations for regional logistics contracts. The recent appointment of Tasco’s chairman and founder, Lee Check Poh as Yusen Logistics’ (Yusen) (9370 JP, NR) regional executive officer for South Asia and Oceania effective 1 Apr 2015 should propel Tasco to grow its customer base further, in our view.

Forecasts. We expect Tasco’s warehousing business to be the key topline driver, which should spur revenue contribution from its trucking division and contract logistics division. We expect these two divisions to grow by 12-20% in FY16-17, but we conservatively only expect theairfreight and sea freight divisions to grow by 2-3% over the next two years. In view of the favourable outlook for Tasco’s expansion plans, we raise our earnings projections for FY15/FY16/FY17 by 7%/12%/11% respectively.

Maintain BUY with a higher TP. We maintain our BUY call with our TP raised to MYR4.76 (from MYR3.43), premised on 13x P/E (previously 10.5x) on FY16 EPS. Coupled with its decent improving ROEs of 11 -13%, solid net cash position and 3-year projected earnings CAGR of 17.4%, we think this growing logistics company deserves a P/E multiple of 13x, as interest from institutional investors has picked up.

Key Highlights Full house. Tasco’s new Port of Tanjung Pelepas (PTP) 2-storey warehouse measuring 210,000 sqf started operations in late Jan 2015, and we understand that utilisation space is currently full. Being in a free zone area and given its close proximity to Singapore, we gather that demand at PTP is overwhelming, puttingpressure on the company to seek more warehouse space by leasing from third parties in the interim. Including its newly-acquired PTP warehouse, total floor space now is approximately 2.2m sqf.

Actively bidding for new jobs. According to The Edge Weekly article, Tasco has a client base of 80 companies which uses its warehouses throughout Malaysia. Its managing director, Freddie Lim was quoted in the article that it is actively bidding for new jobs – receiving as many as 80-100 invitations for regional logistics contracts.The recent appointment of Tasco’s chairman and founder Lee Check Poh as Yusen’s regional executive officer for South Asia and Oceania, effective 1 Apr 2015, should propel Tasco to grow its customer base further, in our view. We understand that the company aims to expand its less-than-container-load business to 17 countries from two. On a separate note, Yusen had been aggressively expanding its warehousing business in Vietnam, China, Myanmar and Thailand in 2014, which bodes well for Tasco’s future growth.

High demand for warehousing. Tasco’s warehousing business offers decent low double-digit margins currently (at PBT level) and high single-digit overall rental yields given its high turnover. It is the company’s fastest-growing business division, with revenue growing to MYR133.2m in FY14 from MYR36.2m in FY07 (7-year CAGR of approximately 20%). As logistics is an end-to-end business with various services being integrated into it, Tasco’s growing warehouse offerings have created a multiplier effect on its other segments – save for air freight, which has remained constant since 2007. Currently, the company is operating at 11 locations across Malaysia. We foresee its PTP warehouse to provide a new growth driver for the logistics company, which could benefit from the potential spillover effect of the shift of Singapore-based manufactures to Johor eventually, given the high operating costs in Singapore.

Possible expansion into courier segment. Leveraging on its e-commerce clients such as Zalora, Tasco is also looking into the possibility of providing last mile delivery, ie express courier services. We gather that thi s is something management had explored many years back with a possible joint venture (JV) with Yamato Holdings (9064 JP, NR), which had failed to materialise for undisclosed reasons. Should Tasco venture into this segment on its own, it would have to star fromscratch by setting up a parcel and document sorting hub and its own fleet of trucks and motorcycles. We think a parcel sorting hub based in Shah Alam would be too far for most door-to-door destinations in the Klang Valley, which are mostly situated in the more densely-populated areas such as Kuala Lumpur and Petaling Jaya. Economic direction. While there are some concerns over the global economy, we believe the US and UK economies will likely continue to drive global economic growth going forward.

Despite facing some challenges, we are seeing improving economic prospects for the Eurozone. On the domestic front, we believe the outlook for exports is gradually improving on the back on the global economic recovery. Slower growth in resourcebased industries would be offset by stronger production in the electronics andelectrical (E&E) cluster, which should boost performance in export-oriented industries, in our view. As it stands, global semiconductor sales held up at 9.4% YoYgrowth in 2H14 vs +10.4% in 1H14, led by a double-digit increase in sales in the Americas and Asia-Pacific. Coupled with a weaker MYR, we expect real exports to grow 4.2% YoY in 2015 (2014: +5.1%).

Forecasts Topline drivers. We expect Tasco’s warehousing business to be the key topline driver, which should spur revenue contribution from its trucking division and contract logistics division. We expect these two divisions to grow by 12 -20% in FY16-17. However, we conservatively only expect its airfreight and sea freight divisions to grow by 2-3% over the next two years, although further growth upside is possible as the company is growing its less-than-container-load business more aggressively.

Margin expansion seen. Although the low petrol pump prices will mostly be passed on to customers, we foresee some operational cost savings . Its loss-making trucking division returned to the black last quarter (after three quarters of losses), which we expect to be sustainable moving forward. Additionally, with its venture into the highermargin less-than-container-load segment, we expect margins from its ocean freight forwarding division to improve ahead. Higher inventory turnover by customers at its warehouses could further boost warehousing margins. All in, we expect Tasco’s core net margin to progressively improve to 6.3%/6.4%/6.6% in FY15/FY16/FY17 respectively from 5.5% in FY14.

Changes to forecasts. In view of the favourable outlook for Tasco’s expansion plans, we raise our earnings projections for FY15/FY16/FY17 by 7%/12%/11% respectively. The earnings upgrade is on the back of an increase in revenue (FY15: +1%; FY16: +9%; FY17: +8%) coupled with improved margins arising from improved economies of scale in its operations and lower petrol pump prices.

Valuation And Recommendation Maintain BUY with a higher TP. We maintain our BUY call, following our FY15-17 earnings upgrade of 7-12%. Our TP is raised to MYR4.76 (from MYR3.43), premised on 13x P/E (previously 10.5x) on FY16F EPS. The P/E multiple of 13x is at a slight premium to the FBM small-cap average P/E currently, where its historical P/E stands at 12.7x. At a 35% payout ratio, Tasco potentially offers decent FY15-17 dividend yields of 3-3.9%. Coupled with its decent improving ROEs of 11-13%, solid net cash position and 3-year projected earnings CAGR of 17.4%, we think this growing logistics company deserves a P/E multiple of 13x, as interest from institutional investors has picked up. Tasco has re-rated to 10x FY16F forward P/E currently from a forward P/E of 7x when it was listed in Dec 2007 (at an IPO price of MYR1.10). We expect net profit to increase to MYR32.2m in FY15 from MYR12.4m in FY06.

Source: RHB Research - 14 Apr 2015