GD Express Carrier Bhd
(Dec 27, RM1.71)
Outperform call with a target price (TP) of RM1.97: We are initiating coverage of GD Express Carrier Bhd (GDEX), which has a solid earnings growth story with a three-year compound annual growth rate (CAGR) of 22.3% riding on the booming e-commerce scene, with utilisation overload the only obstacle to overcome before achieving exponential growth.

Founded in 1997, GDEX has grown to become the second-largest domestic parcel delivery player in the country behind Pos Malaysia Bhd in terms of market share. Since listing in 2005, its bottom line has grown at an impressive CAGR of 28.2%. Its parcel express delivery can be categorised into business-to-business (B2B) and business-to-customer (B2C), which represent the company’s e-commerce delivery business with a revenue mix as at the financial year ended June 30, 2016 (FY16) standing at 26% and 74% respectively.

Riding the growing domestic trend of e-commerce, we project its B2C delivery to grow 50% to 70% in the next three years, surpassing B2B delivery revenue by FY19. The company saw a 70% to as high as 500% growth in B2C delivery in the past three years, with a CAGR of 246%. Meanwhile, its B2B delivery business is expected to remain resilient, as we project a constant 3% to 5% growth moving forward, leveraging on GDEX’s strong-standing relationships with its client base.

We believe FY16 express delivery revenue growth could be higher (13.5% versus an average of 17.6% three years prior) if not for capacity constrains faced at its sorting hub. Management recently restructured its sorting hub workflow, which effectively increased its sorting capacity by 28%, from an average of 78,000 to 100,000 pieces/day, which should be fully reflected in FY17. With express delivery revenue growth projected at 15% to 19%, we reckon this temporary fix will only last one to two years before reaching full capacity again. Management is currently on the hunt for an additional sorting hub to run concurrently to remove the existing growth constraint.

Earlier in the year, GDEX underwent a private placement, with Yamato Holdings emerging as its second-largest shareholder with a 22.84% stake, raising RM209 million cash for GDEX — a sizeable war chest for inorganic growth which GDEX has already tapped. Furthermore, we believe GDEX does not need to raise fresh funds to finance any capital expenditure (capex) for existing businesses as its current strong cash flow-generating ability is more than sufficient. With the entire war chest solely for inorganic growth, we believe GDEX would end up with multiple acquisitions, with Indonesia the most likely target country.

Although its share price had already rallied 90% from its recent low in August 2015, we still see great upside potential in view of its strong earnings growth of 16% to 31% projected for the next three years. Our TP implies a forward price-earnings ratio (PER) of 77 times for FY17, which is +0.5 standard deviation above its five-year mean of 63 times. We believe the valuation is justifiable given that it has always traded at similar forward PER levels historically, reaching as high as 100 times in June 2014. Risks to our call include higher-than-assumed capex and lower-than-assumed volume growth. — Kenanga Research, Dec 27