Century ... Aug11

Mercury Securities Sdn Bhd Research

Century’s 1H/FY11 results (6-month period ended 30th June 2011) were roughly within our earlier expectations.

“1H results within expectations”
Century recorded revenue of RM74.2 million for its 2Q/FY11, a slight decrease of 1.4% y-o-y. This was mainly due to the lower export shipments from the procurement logistics business segment. Nevertheless, group NPATMI (net profit after tax and minority interest) had increased by 15.8% y-o-y. This was mainly due to the increased business activities from a few new contract logistics corporate customers (e.g. Celcom Axiata, F&N Diaries and Midea Scott & English).

“Contract logistics expanding”
Looking at 1H/FY11 figures, Century recorded revenue of RM141.0 million, an increase of 4.4% from 1H/FY10. Group NPATMI for 1H/FY11 was RM15.1 million, an increase of 7.2% from 1H/FY10.

OUTLOOK/CORP. UPDATES
We remain optimistic on Century’s overall group performance during its FY11 ending 31st December 2011 in spite of the global economic situation. Furthermore, the group’s promising Procurement Logistics, Third Party Logistics (3PL) and Oil & Gas Logistics business segments are expected to perform favourably during the year.

“Concern - external environment”
According to the IMF’s (International Monetary Fund) June 2011 World Economic Outlook (WEO), economic activity is slowing down temporarily, downside risks have increased again and global expansion remains unbalanced. Growth in many advanced economies is still weak, considering the depth of the recent recession. In addition, the mild slowdown observed in the second quarter of 2011 is not reassuring. Growth in most emerging and developing economies continues to be strong. Overall, the global economy expanded at an annualized rate of 4.3% in the first quarter, and forecasts for 2011–12 are broadly unchanged.

However, IMF views that greater-than-anticipated weakness in U.S. activity and renewed financial volatility from concerns about the depth of fiscal challenges in the Euro area pose greater downside risks. Risks also draw from persistent fiscal and financial sector imbalances in many advanced economies, while signs of overheating are becoming increasingly apparent in many emerging and developing economies.

The latest available Malaysian economic data (June 2011) seemed to reveal a weakening in external demand. These data include: IPI (+1.0% y-o-y), Manufacturing Sales (+12.9% y-o-y), Exports (+8.6% y-o-y) and Imports (+6.3% y-o-y). Malaysia had reported stable 1Q/2011 unemployment rate of 3.1% and a CPI of 3.5% (June 2011). In early July 2011, Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0% but raised the statutory reserve requirement (SRR) of 3% to 4% in order to rein-in inflationary pressures.

Century’s management continues to take the necessary measures to remain resilient, including focusing on providing value-added logistics solutions as well as maintaining cost efficiencies. The continued expansion of the group’s customer base for its supply chain solutions is encouraging. Century’s solid financial position and low gearing enables the group to maintain strong results as well as embarking on strategic acquisitions to enhance its earnings growth.

The group plans to expand its supply chain solutions offering, and are also focusing on increasing its participation in the oil and gas logistics activities, including diversification upstream and downstream of the sector. In oil and gas logistics, Century currently provides floating storage and trans-shipment services for international oil trading companies. Century also provides procurement logistics services to various multi-national electrical and electronics customers.

VALUATION/CONCLUSION
Century’s BOD (board of directors) had just declared a single tier interim dividend of 5 sen per share for its FY11 ending 31st December 2011. The 4 sen single tier final dividend for Century’s FY10 was paid on 10th June 2011.

“Consistent dividend payout”
Given Century’s strong earnings performance, we expect Century to maintain its recent dividend payout track record of at least 20% of its annual net profits.

With an adjusted beta (correlation factor) of 0.28 to the KLCI, Century (-8.6%) has outperformed the KLCI (-1.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings in the Middle East/North Africa, the major Tohoku natural disaster in Japan, debt-ceiling issue in the US and sovereign debt issue in Europe. As Century is not an especially large market-cap stock at the moment, this may put a dampener on its market visibility and trading volume.

“Seriously Undervalued”
Based on our forecast of Century’s FY11 EPS and an estimated P/E of 6 times (within its historical range), we set a FY11-end Target Price (TP) of RM2.60. This TP represents an attractive 52.3% upside from its current market price. Our TP for Century reflects a P/BV of just 1.07 times over its FY11F BV/share. Meanwhile, the local Transportation Service sector’s average P/E and P/BV is 24.6 times and 1.37 times, respectively.

We like Century due to its rather diversified business model, calculated growth strategy, undemanding P/E and P/BV valuations, solid dividend yield and ROE. With a strong management team, dwindling gearing levels, tight cost-control and an efficient operational structure, Century is well poised to have a positive year ahead.

Nevertheless, there are possible routine risks to the logistics sector such as slowing global economic growth rates. The Arab Spring uprisings in the Middle East/North Africa and the Tohoku natural disaster in Japan could also impact international trade to a certain extent. Factors such as foreign exchange fluctuations, lowly sovereign debt ratings in certain European countries and the sustained high unemployment levels in the US could also dampen sentiment, demand and hence international trade levels.