Results Report. MERCURY SECURITIES SDN BHD ( w) FREIGHT MANAGEMENT HOLDINGS BERHAD [7210/FREIGHT] Hold/Market Perform 2Q/FY17 RESULTS

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1 MERCURY SECURITIES SDN BHD ( w) (A Participating Organisation of Bursa Malaysia Securities Berhad) FREIGHT MANAGEMENT HOLDINGS BERHAD [7210/FREIGHT] Results Report 23 February, 2017 MAIN MARKET TRADING/SERVICES Hold/Market Perform 2Q/FY17 RESULTS Freight Management Holdings (FMH) 2Q/FY17 results (for quarter ended 31 st December 2016) were generally in-line with our earlier expectations. Positive results led by Sea Freight During 2Q/FY17, the group recorded revenue of RM115.4 million and NPATMI of RM5.1 million. Both revenue and NPATMI were higher y-o-y versus the corresponding 2Q/FY16. Freight volumes generally were improved y-o-y, leading to a strong performance by the Sea Freight and Air Freight segments. Meanwhile, the group s 3PL & Warehousing business segment also performed well y-o-y, while its Tug & Barge segment has continued its recovery in revenue. Looking q-o-q versus the preceding 1Q/FY17, FMH recorded higher revenue, while NPATMI was slightly lower q-o-q. Compared to the preceding quarter, the group s Sea Freight, Air Freight and 3PL & Warehousing business segments did well. However, the performance of other business segments was rather flattish. 2Q/FY17 earnings and margins also appeared lower q-o-q due to a gain on disposal of PPE (Property, Plant & Equipment) during 1Q/FY17. RECOMMENDATION Based on our forecast of FMH s FY17 EPS and an estimated P/E of 9.5 times, we set a FY17-end Target Price (TP) of RM This TP is 10.1% above the market price on the date of this report. Our TP for FMH reflects a P/BV of times over its FY17 BV/share. Market Price (RM) : 1.19 Target Price (RM) : 1.31 Potential Upside (%) : 10.1 KEY DATA 52w High (RM) : w Low (RM) : 1.10 Market Cap (RM mil) : Issued Shares (mil) : FY17 P/E (times) : 8.6 FY17 P/BV (times) : 0.9 FY17 Div yield (%) : 4.2 MAJOR SHAREHOLDERS (est) Chew Chong Keat : 28.8% Singapore Enterprises Pte Ltd : : 20.2% Yang Heng Lam : 18.8% Our Hold / Market Perform Call reflects our cautious view on the regional and global business and trade environment. Nevertheless, we still expect FMH s FY17 revenue and earnings to continue showing positive growth y-o-y. Prepared by: ~ Research Team

2 OUTLOOK/CORPORATE UPDATES Positive Freight growth Overall, we expect that FMH will have a positive outlook during its FY17. The group s growth would be underpinned by its core Sea Freight business. Sea, Air and Land Freight volumes all held up well. Nevertheless, we are mindful of the challenging external operating environment given the slow global economic growth, weak freight rates and stiff competition within the logistics industry. The group s FCL (Full Container Load) freight volumes (in TEU terms) grew by 13.3% y-o-y during 1H/FY17, while its LCL (Less than a Container Load) segment recorded a growth in freight volume by 8.7% y-o-y. In the 3PL & Warehousing (third party logistics) segment, FMH has built quite a good reputation, particularly for sectors such as lubricants, high fashion/apparels and consumer electrical products. FMH s management is counting on its 3PL & Warehousing business segment to grow further in the upcoming quarters, with some being submitted from time to time. This segment s growth was aided by the group s newly-built 140,000sf warehouse facility ( Lot 37B ) in Port Klang. Additionally, warehouse Lot 24 in Port Klang was refurbished to incorporate temperature control storage ( meant for Pharmaceutical or Healthcare corporate clients), and the group s Butterworth warehouse was converted to a bonded facility. In recent years, the group had successfully obtained new clients, including from the pharmaceutical, F&B and electrical consumer goods industries. The group s Tug & Barge business segment is turning around with a modest profit in its 1H/FY17, Nevertheless, the Tug & Barge industry is still facing a situation of weak demand, over-supply of barges, compressed profit margins and stiff competition. Malaysia s economic statistics generally positive Malaysia recorded a 4Q/2016 GDP growth of 4.5%, according to Bank Negara Malaysia. BNM has maintained its accommodative overnight policy rate (OPR) at 3.0%, while inflation (CPI) ( January 2017) has hiked up to 3.2%. Malaysia s January 2017 PMI stood at the improved level of For December 2016, Malaysia recorded encouraging y-o-y growth of +10.7% for Exports, +11.5% for Imports, +10.6% for Manufacturing Sales and +4.7% for Industrial Production Index (IPI). IMF s global outlook Trump factor In its January 2017 World Economic Outlook, the International Monetary Fund (IMF) has forecasted world economic growth at 3.4% for 2017 and 3.6% for Global economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies (EMDE). However, there is wide uncertainty surrounding the policy stance of the incoming U.S. Trump administration and its global ramifications. Policy stimulus in the US and China is expected to further stimulate growth. However, growth forecasts for Brazil, India, Argentina, Turkey and Mexico were lowered. This WEO forecast also incorporates a firming of oil prices following the agreement among OPEC members and several other major producers to limit supply. In terms of world trade volume, the IMF has forecasted growth of 3.8% for 2017 and 4.1 for Notable negative risks to economic activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the Euro Area and in some emerging market economies, increased geopolitical tensions, and a worse slowdown in China. 2

3 IMF: output growth figures (%) Area E 2018F World U.S Euro Area UK Japan China India ASEAN E&D Asia* *Emerging & Developing Asia (also includes China, India & ASEAN -5); ASEAN-5 consists of Malaysia, Indonesia, Philippines, Thailand and Vietnam. # Generally, forecasts show slowing growth in the UK, Japan and China. WTO s forecast In December 2016, the World Trade Organization ( WTO) projected a 1.7% increase in world merchandise trade volume in 2016, down from its earlier forecast of 2.8%. If this revised forecast is realized, this would mark the slowest pace of trade and output growth since the financial crisis of Nevertheless, the WTO still viewed that trade volumes will improve, going forward. Regional contributions growing We note that FMH s freight business is mostly focused on trade within the Asia-Australia region, as such the group would generally not be affected substantially by any weak business sentiment in the US and Europe. Emerging & Developing Asia (including China and India) still records strong GDP growth of above 6%. Furthermore, the group has its competitive advantage arising from its niche in providing one-stop and packaged services to customers. During 1H/FY17, about 27.2% of FMH s revenues were derived from its overseas operations in neighbouring countries such as Singapore, Australia, Indonesia, Vietnam, Thailand, Philippines, Sri Lanka and India. The Singapore figures reflect s the group s Tug & Barge segment. FMH s Thailand logistics operations are still in the midst of restructuring, while the group s relatively new South Asia ( Sri Lanka and India) logistics operations were hovering close to the break-even level. FMH is keen on exploring new regional business opportunities in East Asia, South Asia and other ASEAN countries for instance Cambodia and Myanmar. The group s wholly-owned FM Global Logistics Ventures S/B (FMGLV), had in November 2014 entered into a JV agreement with Amass Freight International Co Ltd (incorporated in China) to 50:50 jointly set up a company (named Amass Freight Middle East) within the Jebel Ali Free Trade Zone in UAE. In March 2015, FMGLV had subscribed for 50% of the paid-up capital of Amass (50% of about RM million). In February 2015, FMGLV announced the incorporation of a wholly-owned subsidiary, FM Global Korea Corporation (FMGKC) in Korea (with principal activity of general trading). Its initial issued and paid up share capital of KRW200 million (equivalent to approximately RM656,800) comprises 20,000 shares of KRW10,000 each. 3

4 Yields from Shah Alam property The group s wholly-owned FM Global Logistics (M) SB had in August 2015 entered into a S&P Agreement with Johnson Controls Automotive Holding (M) SB to acquire a piece of land (and buildings on it) in Section 26 (Hicom) of Shah Alam, Selangor, for a purchase consideration of RM50 million (before GST charges). This land consists of an approximate area of 34,559sq meters together with 2 double-storey office buildings / canteen and 4 production / warehouse buildings. The purpose of this acquisition is basically to cater for future warehousing needs. In the meantime, this property will yield rental income for FMH. FM Hubwire: expansion phase Back in July 2015, FMH had subscribed for a 20% stake in Hubwire SB for RM1.6 million cash. Hubwire is an omni-commerce enabler that provides IT retail management and solutions, and e- commerce. According to AT Kearney, less than 1% of total retail sales in Malaysia are made online in 2014 as opposed to around 4%-5% in Singapore, hence this is an exciting segment in terms of its growth potential. In March 2016, FMH had announced the incorporation of a wholly owned subsidiary, FM Hubwire Sdn Bhd ( FM Hubwire ), with an initial issued and paid u p share capital of RM2 comprising 2 ordinary shares of RM1 each. Subsequently, the company had on 15 th Apr 2016 subscribed for an additional 649,998 ordinary shares of RM1 each, representing 65% of total ordinary shares of FM Hubwire at a total cash consideration of RM649,998. Currently FMH also holds 1 million RCPS (Redeemable Convertible Preference Shares) of RM1.00 each in FM Hubwire. Subsequently, FM Hubwire will be a 65%-owned subsidiary of FMH, and is running an e-commerce distribution platform for online merchants to list their products for sale to end-consumers, bundled with marketing support, inventory management, content management, customer service management, warehousing and logistics services. FM Hubwire is beginning to make its mark in the e- commerce industry in Malaysia, and is seeing a progressive increase in both transaction volumes and the number of merchants that have signed up for its unique end-to-end services. VALUATION/CONCLUSION DPS level expected to be maintained In July 2016, FMH had paid out a first interim single tier dividend of 1.5 sen per share, for its FY16 ending 30 th June 2016 (amounting to about RM2.7million). Thereafter, FMH s Board of Directors had paid out a second interim single tier dividend of 3.5 sen per share (for its FY16) (amounting to about RM6.3million) on 22 nd November 2016 to shareholders of FMH. Given FMH s relatively steady earnings performance, we believe that the group will maintain its dividend payout track record of at least 30% and DPS (dividend per share) of at least 5 sen, for its FY17. Maintain Hold Call, with some Upside Based on our forecast of FMH s FY17 EPS and an estimated P/E of 9.5 times, we set a FY17-end Target Price (TP) of RM1.31. This TP is 10.1% above the market price on the date of this report. Our TP for FMH reflects a P/BV of times over its FY17 BV/share. Our Hold Call reflects our cautious view on the regional and global business and trade environment. Nevertheless, we still expect FMH s FY17 revenue and earnings to continue showing positive growth y-o-y. 4

5 Reasonable valuations and ratios We note that FMH s net gearing level had gone up slightly during its FY16, which was mainly due to financing a new rental-yielding property in Shah Alam. We nevertheless expect the group s net gearing level to reduce in its FY17. The group also has reasonably attractive P/E and P/BV valuations, Dividend Yields and ROEs. Looking back, FMH s annual revenue did reach the RM400 million level in its FY14. The RM200 million revenue threshold was reached in FY08 while the RM300 million revenue level was reached in FY12. Solid business structure FMH has a one-stop business model and a calculated growth strategy. With a strong management team and a multimodal, asset-light, tight cost-control and operationally efficient business model, FMH possesses positive long term prospects. The group also has ample capabilities, cash reserves and operational flexibility to expand organically and also to explore new JV and M&A opportunities. Further group earnings upside would be dependent on factors such as freight volumes, freight rates, regional business expansion, global economic growth, cost control, peer competition, 3PL client additions and also any future JVs and M&As. As usual, there are possible risk factors to the the group - such as the weak global economy, volatile financial markets, weak crude oil prices / commodity prices, and external political/military upheavals. FMH s profit margins could also be impacted during times of sudden or heightened foreign exchange (FX) and freight rate fluctuations. FINANCIAL STATEMENTS 2Q/ 31 Dec 2Q17 2Q16 yoy % 1Q17 qoq% Revenue (RMm) EBIT (RMm) (15.2) 4.9 (2.0) NPATMI (RMm) (4.1) EPS (sen) (4.1) *NPATMI = net profit after tax & minority interest 6M/ 31 Dec 1H/FY17 1H/FY16 yoy % Revenue (RMm) EBIT (RMm) (3.9) NPATMI (RMm) EPS (sen) *NPATMI = net profit after tax & minority interest 5

6 Ratios Analysis F Book Value/Share (RM) Earnings/Share (sen) Dividend/Share (sen) Dividend Payout Ratio (%) P/E Ratio (x) P/Book Value (x) Dividend Yield (%) ROE (%) Net Gearing (or Net Cash) (x) *RM0.50 par value P&L Analysis (RM mil) F FY end: Jun 30 Revenue Operating Profit Depreciation (11.2) (13.5) (15.1) (14.4) Interest Expenses (2.1) (3.0) (4.2) (4.0) Profit before Tax (PBT) Effective Tax Rate (%) Net Profit after Tax & MI Operating Margin (%) PBT Margin (%) NPATMI Margin (%) *2017 figures are our estimates 6

7 Freight: Share Price Source: Bursa CBRS disclaimer: This report has been prepared by Mercury Securities Sdn Bhd for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and has been compensated to undertake the scheme. Mercury Securities Sdn Bhd has produced this report independent of any influence from CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia s website at: 7

8 Recommendation Framework Buy/Outperform The stock s total return is expected to be +15% or better over the next 12 months. Neutral Sell/Underperform Trading Buy The stock s total return is expected to be within +/-15% over the next 12 months. The stock s total return is expected to be -15% or worse over the next 12 months. The stocks total return is expected to be 10% or better over the next 3 months Trading Sell The stock s total return is expected to be -10% or worse over the next 3 months. DISCLAIMER All information, views and advice are given in good faith but without legal responsibility. Mercury Securities Sdn. Bhd. or companies or individuals connected with it may have used research material before publication and may have positions in or may be materially interested in any stocks in the markets mentioned. For any enquiries, please contact us: L-7-2, No.2, Jalan Solaris, Solaris Mont Kiara, 50480, Kuala Lumpur Tel: mercurykl@mersec.com.my