Freight Management - Potential M&A play?

INVESTMENT MERIT

- Potential M&A play?  We notice that the share price movements of local logistics companies in the past year have been largely bullish after CENTURY openly declared that it was looking for an M&A target in Feb 2012. The M&A talk resurfaced in November recently, which explained the 10% rise within a month in FREIGHT’s share price before it fell back by 5% in early December due to its weak 1QFY13 results. Nonetheless, the ongoing M&A talk could continue to spur buying interest in the sector and FREIGHT also claimed that it is open to a M&A for expansion.

- Soft start in 1QFY13 but to rebound in 2QFY13 onwards. Due to the slower demand, Hari Raya festive season and a higher opex, FREIGHT posted a lower 1QFY13 net earnings, which dropped 32% QoQ to RM4.9m. However, a stronger 2QFY13 is expected as its business activity normalises after the long Raya break, in addition to better earnings from Sea Freight (with its Less Than A Container Load (LCL) offering likely better earnings margin) as well as  from its Third Party Logistics (3PL) & Warehousing division. Going forward, its 3PL & Warehousing division will be the new earnings driver. In all, we project a 8% YoY earnings growth to RM22.5m in FY13, translating into FY13 EPS of 13.9 sen. 

- Decent dividend yield.  While it has no written dividend policy, FREIGHT has been constantly paying an average of 30% dividend payout ratio semi-annually since FY2005.  Based on  this historical pattern, we are projecting a NDPS of 4.2 sen for FY13, implying a 4.4% dividend yield, which is fairly decent.  

- Fully valued for now, but…. At its current share price of RM0.94, the stock is trading at around FY13 6.6x PER compared to the sector’s average of CY13 6.2x PER. Valuing it at 7x (vs our average small cap PER of 8x due to its liquidity issue), FREIGHT is worth RM0.97. Hence, the stock is almost FULLY VALUED for now. However, we will relook at this stock if and when an M&A opportunity emerges. 

SWOT ANALYSIS

- Strengths:  i) asset-light strategy leads to better cost management, ii) focusing on LCL segment which offers better margin. 

- Weakness:  Overall performance may be affected by its Tug & Barges division, which is set to break-even only for FY13.

- Opportunity:  New associate income stream from its ship repair & maintenance yard in Kantong, Thailand.

- Threats: The weak global economic outlook as its earnings are highly correlated to the global economic condition.

TECHNICALS

- Resistance: RM1.00 (R1), RM1.07 (R2)

- Support: RM0.88 (S1), RM0.85 (S2)

- Comments:  FREIGHT's share price had been range bound for the most part of the year. Though a mild upward bias exists, the technical indicators are at the moment non-trending. Only a breakout of either the RM1.00 resistance or the RM0.88 support would offer some direction. 

BUSINESS OVERVIEW

FREIGHT was established in 1988 and listed on Bursa Malaysia in 2005. FREIGHT is a wholly Malaysian owned international freight service provider and through its subsidiaries, the group offers complete multimodal international freight services covering  sea, rail, air freight and tug barge services, customs brokerage and distribution container haulage and conventional trucking services. 

BUSINESS SEGMENTS

- Freight business. (Sea, Rail, Air and Land). Core business of the group as contributing more than 70% turnover, particularly its sea freight unit. Sea freight unit contributes ~55% of group’s revenue as it offers both export and import freight services for both LCL and Full Container Load (FCL) shipments.

- 3PL & Warehousing.  FREIGHT provides complete warehousing solutions to its MNC customers in its warehousing complexes (c. 450, 000 sq ft of land area) which are facilitated with temperature control storage, value added cold room and new racking systems.

- Tug and Barge. FREIGHT operates a fleet of 7 Barges and 9 Tugboats and is a leading tug and barge operator servicing the Straits of Malacca.

- Customs Brokerage. As a One-Stop Freight Solution provider, FREIGHT offers customs brokerage at all the local major gateways of ports and airports.

- Haulage. FREIGHT owns a fleet of 53 prime movers and 334 trailers, which support its Land Freight business and services.

Source: Kenanga