TASCO (5140) - Tasco Bhd - Synergy on Venturing Into Trading Business

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What’s New
  • Positive outlook intact. We have gathered Tasco’s latest prospect and development plans from the recent management meeting. Overall, we are positive on its outlook and reiterate our BUY call on the stock with a target price of RM2.49.
  • Kick start its Trading business with soon-to-be launched pioneer project. YLTC Sdn Bhd (a 60:40 JV between Yee Lee Corporation Bhd and Tasco Bhd) is about to roll out a project to cooperate with Shell for its 600+ Shell’s Select shops nationwide. YLTC will supply in-shop items and provide logistics services and inventory management system to these Shell shop operators or dealers.

Comments

  • ‘Win-win situation’ for the Trading business - We understand that YLTC Sdn Bhd will leverage on Yee Lee’s trading experience, wide distribution network and know-how in facilitating the trading activities between the F&B manufacturers/wholesalers and shop operators/petrol kiosks. Meanwhile, YLTC Sdn bhd will leverage on Tasco’s vast experience in warehouse management and logistic arrangement to carry out logistics and inventory management for the Shell’s Select shops nationwide. Currently, we learnt that these shop operators or petrol kiosks are procuring the F&B merchandise on their own and hence lacking bargaining power with the manufacturers or wholesalers. With the plan coming onboard, the Shell’s Select shops are only required to deal with YLTC Sdn Bhd for the stocks replenishment, orders, delivery and storage.
  • Tasco expects to benefit from the JV co. (profit to be recognized under associate level) and Contract Logistics business – Profit from YLTC Sdn Bhd will be reflected under Tasco’s account (associate level). Meanwhile, YLTC Sdn Bhd will outsource contract logistics services portion (both dry and cold chain warehouse spaces, and trucking) to Tasco on arm’s length basis. Based on our preliminary estimates, Tasco could record a yearly profit of c.RM1.5m under associate level if the project runs in full swing (expect to flow in starting 4QF19 onwards). At the same time, it will contribute total revenue of RM32m-RM50m (assuming 9-14% logistics related costs to sales) for Contract Logistics business, which translates into a PBT of RM2.2m RM3.5m (assuming a blended PBT margin of 7%).
  • Trading business could further propel growth in the long run – Should this pilot project roll-out smoothly, it could easily be replicated and target other potential clients. As mentioned earlier, Tasco’s Contract Logistics Division is expected to benefit substantially from YLTC in the longer term.
  • Expecting flattish earnings for FY18 but picking up in FY19 - We expect 4QFY18’s earnings (-18.7x% yoy and - 21% qoq) continue to be bogged down by additional costs in support segment that resulted from increased professional and compliance expenses for corporate exercise and finance costs for Cold Supply Chain (CSC) business. As such, Tasco’s net profit for FY18 would be flattish, RM30.4m (-0.9% yoy) in view of partly recognition of CSC and higher expenses. Looking forward, we envisage the group to fully recognise its newly acquired CSC business segment in FY19 with an estimated revenue of c.RM100m. Meanwhile, finance cost remains elevated whilst additional costs in support segment to fade out. Overall, FY19 net profit is expected to rise 25.5% yoy to RM38.1m.
  • Possibly obtaining approval on Investment Tax Allowance – We understand that Tasco is in the midst of applying for an Investment Tax Allowance. If Tasco is able to secure the approval, we foresee a tax saving of RM3-5m and probably recognize as early as FY2019F. To recap, Tasco applied a similar tax allowance before and recognized it in FY2011. The total tax saving was RM3.9m, which translated into an effective tax rate of 14.6% (vs statutory tax rate of 25%).

Earnings Outlook

  • We tweak down our earnings forecast for FY18 by 6% from RM32.6m to RM30.4m but remain our earnings forecast for FY19. Also, we introduce our earnings forecast for FY20, which enjoys a yoy growth of 17%.
  • Major risks include: 1.) Higher fuel price, 2.) Change in government policy, 3.) Loss of major customers, and 4.) Slowdown in domestic and overseas economy.

Valuation/Recommendation

  • Maintain BUY call for Tasco with an unchanged target price of RM2.49. We pegged our valuation at 13x FY19F EPS. Our target PE valuation is slightly higher than the average forward PE of its peers of 12.8x in view of its commanding position in the sector and at the range of upcycle forward PE.
  • Overall, we are sanguine on its future growth following its venture into cold chain market. With this, TASCO is able to generate synergies across all of its divisions and provide integrated logistics services for its clients. Furthermore, the trading business will create further synergy to its existing businesses such as Cold Chain and Contract Logistics.
Source: JF Apex Securities Research - 14 May 2018