Thursday, May 31, 2012

Freight ... May12

Mercury Securities Research ...

Q3 results –within expectations”
Freight Management Holdings’ (FMH) 3Q/FY12 result (for quarter ended 31st March
2012) was within our earlier expectations.

“Most segments performed well”
The group recorded revenue of RM68.7 million and NPATMI of RM4.2 million during 3Q/FY12. This was an increase of 3.3% and 13.3% y-o-y, respectively. Compared with 3Q/FY11, higher revenue was reported in all the group’s business segments, with the exception of “Tug & Barge” services that reported a slight decrease. Group Land Freight and “3PL & Warehousing” segments did particularly well.

The group registered a higher gross profit (GP) margin from 24% in 3Q/FY11 to 27% in 3Q/FY12 due to its ongoing internal exercise on cost control and operation efficiencies. However, the group’s Haulage and Customs Brokerage segments are facing pressures on margins due to costs and price competition.

Looking at 9M/FY12 numbers, group NPATMI is slightly down y-o-y, but we are not unduly
worried. This decrease was due to a higher tax level in 9M/FY12 versus 9M/FY11 and higher
minority interest (MI) from an improved performance from its 51%-owned Tug & Barge
segment subsidiary. 9M/FY11 NPATMI profits had benefited from a tax write-back.

“Weaker q-o-q numbers due to seasonal factor”
Compared to the preceding 2Q/FY12, the group’s 3Q/FY12 revenue and NPATMI were lower by 6.6% and 18.9% q-o-q, respectively. The q-o-q decline in revenue was due to the trading and production slowdown by the group’s customers during the Chinese New Year festive period in February 2012. As such, we are not unduly worried, as the numbers were affected by a seasonal factor.

OUTLOOK/CORP. UPDATES
“Our outlook – cautious but still positive”

We expect that FMH would continue to report a positive performance during its FY12-FY13.
The group’s growth would be underpinned by its core Sea Freight business, supported by solid
numbers from its “3PL & Warehousing”, Land Freight and Air Freight business segments. For
the 3PL segment, FMH has built quite a reputation, particularly for segments such as –
lubricants, apparels and consumer electrical products.


“Minimal exposure to US & Europe”

We note that FMH’s freight business is mostly focused on trade within the Asia-Australia region, as such the group would not be affected that much by the weak business sentiment in the US and Europe. The group’s core Sea Freight segment continues to enjoy growing TEU volumes and margins. This is partly due to its

pricing flexibility arising from its niche in providing one-stop and packaged services to customers.

The group’s FCL (Full Container Load) TEU volumes continued to grow steadily, aided by solid volumes to East Asian ports (which also commanded higher GP margins). Meanwhile, its LCL (Less than a Container Load) TEU volumes were slightly affected by the recent major floods in Thailand during Q2. Nevertheless, its LCL Land Freight volumes are slowly but surely recovering.

“IMF: Growth resuming, risks remain”
According to the IMF’s latest World Economic Outlook (WEO-April 2012), global prospects are gradually strengthening again, but downside risks remain elevated. Improved economic activity in the U.S. during the second half of 2011 and better policies in the Euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown. Accordingly, weak recovery is likely to resume in the major advanced economies, and economic activity is expected to remain relatively solid in most emerging and developing economies.


Overall global economic growth is projected to drop from about 4% in 2011 to about 3.5% in 2012, but to recover to 4% in 2012. Given the sovereign debt crisis, the Euro area economy is still expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank de-leveraging on the real economy, and the impact of additional fiscal consolidation. Real GDP growth in the emerging and developing economies is projected to slow (due to policy tightening, external environment and weak demand) from 6.25% in 2011 to 5.75% in 2012 but then to reaccelerate to 6% in 2013, helped by easier macroeconomic policies and strengthening foreign demand.

“BNM: Malaysia’s 2012 GDP expected to be in the 4%-5% range”
Malaysia's gross domestic product (GDP) grew at a slower pace of 4.7% in 1Q/2012 (compared
with 5.1% in 1Q/2011 and 5.2% in 4Q/2011), which is not too surprising, given the challenging external environment. Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz had said that BNM still expects Malaysia to grow between 4% and 5% during the full year 2012.

Malaysia had reported a reasonable inflation figure (CPI) of 2.3% (1Q/2012). Bank Negara Malaysia (BNM) had still maintained its overnight policy rate (OPR) at an accommodative 3.0%. According to the Malaysian Department of Statistics’ March 2012 data, the country recorded the following – Manufacturing Sales (+3.1% y-o-y), Industrial Production Index (IPI) (+0.6% y-o-y), Exports (-
0.1% y-o-y) and Imports (+1.6% y-o-y). Export growth seems weak currently.

“Still exploring new regional opportunities”
During 9M/FY12, about 23.3% of FMH’s revenues were derived from its overseas operations in Singapore, Australia, Indonesia, Vietnam and Thailand. FMH’s management is still keen on exploring new business opportunities in various ASEAN countries – presumably Cambodia and Myanmar. We are
particularly pleased with the growing contributions from Indonesia while its relatively
new Vietnam operations have started to be profitable.

VALUATION/CONCLUSION
“We expect Dividend Payout to be at the 20-30% range” FMH’s Board of Directors (BOD) has declared
an interim single tier 1.5 sen dividend per share for its FY12 ending 30th June 2012. The dividend will be paid on 16th July 2012 to shareholders registered as at 30th June 2012.

Given FMH’s steadfastly resilient earnings performance and its dividend payout track record of 20% to 30%, we opine that FMH would maintain its dividend payout at this range for its FY12-FY13 as well. FMH (-1.1% YTD) has closely tracked the KLCI (+0.69% YTD) this year. Market conditions have also been volatile during the past year, impacted by the Arab Spring uprisings, the Tohoku natural disaster in Japan, debt-ceiling issue in the US and sovereign debt issue in Europe. As FMH is not an especially large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Maintain Buy Call”
Based on our forecast of FMH’s FY13 EPS and an estimated P/E of 8.5 times, we set a FY13-
end Target Price (TP) of RM1.07. This TP represents a 18.9% upside from its current
market price. Our TP for FMH reflects a P/BV of 1.1 times over its FY13F BV/share.

“Resilient business model”
Even during the times of economic weakness, FMH’s business model had proven to be solid
and resilient. We like FMH due to its one-stop business model, calculated growth strategy,
attractive value (undemanding P/E and P/BV valuations), reasonable dividend yield and ROE.
We also note that FMH has low net gearing levels.

“Set for steady growth”
With a strong management team and a multimodal, asset-light, tight cost-control, operationally efficient and low-gearing business model, FMH seems well-set to grow steadily. FMH also has ample capabilities, financial reserves and operational flexibility to expand organically and also to explore new JV and M&A opportunities. Further earnings upside would be dependent on factors such as freight volumes, freight rates, FMH’s regional business expansion, global economic growth, 3PL client additions and also any future JVs and M&As. As usual, there are possible risks to the global economy - such as the EU sovereign debt
turbulence, volatile financial markets, higher crude oil prices, sustained high unemployment
levels in the US and political upheavals in the Middle East/North Africa. FMH’s profit margins could also be impacted during times of sudden or extreme foreign exchange (FX) and freight rate fluctuations.

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