This article first appeared in The Edge Malaysia Weekly on June 19, 2023 - June 25, 2023

INTEGRATED logistics solutions provider Tasco Bhd should continue to grow this financial year ending March 31, 2024 (FY2024), though the pace is expected to ease.

Group CEO Andy Lee Wan Kai says the group has become more cautious about its outlook for the new financial year after freight volume in April and May came in below its expectations, owing to the Hari Raya holiday in April and the long Golden Week holidays in Japan and China in May, which had forced factories to shut down.

“[The volume of shipments handled in] April and May was a surprise to us, which was lower from a year earlier although it remained far above what was recorded in 2020. We are seeing an uptick in shipment volumes in June and July, but it is unclear whether this pace will continue. Overall, we think it may be difficult to repeat our record performance in FY2023,” Andy, 46, tells The Edge in an interview.

For FY2024, Tasco is projected to post its first year-on-year net profit decline since FY2021, but this is expected to be cushioned by the impact from the integrated logistics solutions segment’s tax incentive.

“We are still hopeful of hitting the RM1 billion revenue mark in FY2024,” Andy says, adding that he sees volumes rebounding in the second half of this year.

The group reported a net profit of RM90.8 million in FY2023, up 39% from RM65.25 million in the previous year. Revenue rose 8% to RM1.61 billion against RM1.48 billion in FY2022.

Record-high freight rates caused by Covid-19-related congestion at ports, shipping container shortages and a surge in consumer spending during the pandemic led to record-high growth and profitability for freight forwarding companies such as Tasco over the past two years. Container freight rates have since returned to near pre-pandemic levels.

Andy points out that Tasco enjoys a consistent profit margin of 8% to 10% on its ocean and air freight rates; however, the sharp fall in international freight rates is expected to hit its profits and revenue.

The last few months of 2022 saw a gradual collapse in freight rates for both dry bulk carriers and container ships. For the latter, the Drewry’s World Container Index showed that a 40ft container cost US$1,681.04 as at June 8, 84% below the peak of US$10,377 reached in September 2021.

“Before the pandemic, the cost of a 20ft standard container from Asia to the US was US$1,500. It reached a high of US$22,000 during the pandemic, but it now costs US$1,000 — below pre-pandemic levels — on certain trade lanes, especially to the US and China,” Andy says.

Nevertheless, the much more affordable container rates have led to an increase in ocean shipment volumes above pandemic levels. “Intra-Asia shipping activity is still quite active, but there is a slowdown in cargo demand [from Asia] to the US and Europe because of the high inflation, coupled with interest rate hikes, that has eroded consumer purchasing power,” he says, adding that air freight volumes, meanwhile, have dropped below pre-pandemic levels as some companies switch from air to ocean.

Analysts like Tasco for its diversified business model, which sustains its earnings base. For instance, its move to focus on the growing aerospace, energy (solar panels), chemicals and food and beverage (F&B) sectors has helped cushion a hit from slowing demand in the electronics, semiconductor and automotive industries.

According to Tasco deputy group CEO Tan Kim Yong, the group has been diversifying its revenue streams by catering for other markets such as the US and Europe to reduce its dependence on Japanese clients. The diversification of its customer base had also led to the group’s diversifying into different sectors, including aerospace, energy and F&B.

Today, Tasco’s dependence on Japanese customers has fallen to 50% of its revenue, from 80% in 2010.

Tasco’s 2022 annual report shows that Yusen Logistics Co Ltd, which is part of Japanese shipping giant Nippon Yusen Kabushiki Kaisha (NYK Group), is Tasco’s largest shareholder, with a 55.38% stake. NYK Group also holds a 9.59% direct stake. Tasco executive chairman Lee Check Poh is its second largest shareholder, with a 9.89% stake held through private vehicle Real Fortune Portfolio Sdn Bhd. Check Poh is Andy’s father.

“We are also not just relying on one segment of the logistics business, but have expanded our business to include contract logistics [such as customs clearance and warehousing businesses] and cold supply-chain,” Tan says, adding that the drop in top-line contribution from its air and ocean freight businesses under its international business solutions segment is expected to be cushioned by the strong performance of its contract logistics and cold supply-chain businesses.

In 2020, Tasco announced that it was spending RM400 million over the next five years to support its long-term logistics capacity needs. The group has since started Phase 1 of its expansion plan at its Shah Alam logistic centre (SALC) in Selangor by rebuilding a modern four-storey warehouse with about 600,000 sq ft of warehouse space and creating a net increase of 470,000 sq ft of warehouse space after demolishing an old single-storey warehouse. The project is expected to be completed by January 2024.

In addition, it is constructing a new 250,000 sq ft warehouse in Westports in Pulau Indah, Selangor, which will be completed in December.

Andy says Tasco currently operates 5.1 million sq ft of warehouse space throughout the country. Of this, 1.6 million sq ft is leased. By January next year, the group is expected to see an additional one million sq ft of warehouse space, bringing the total to 6.1 million sq ft.

“Earlier, our plan was to increase our own warehousing capacity in Shah Alam and pull back our leased space to enjoy some savings. However, we have decided not to proceed with the original plan, as 450,000 sq ft of the 600,000 sq ft of warehouse space in the four-storey building has already been taken up by new customers. The same goes for the warehouse space in Westports,” he notes.

Andy says while warehouse rates remain high at the moment, he expects prices to fall, as he sees more capacity coming on stream. “The reason is that, after the Movement Control Order (MCO) in 2020, people started to build warehouses. But because of the MCO and shortage of workers, there was a delay in the construction of warehouses. In the present situation, there is a shortage of warehousing space as compared to the demand.”

As for its cold supply-chain business, Andy says it expanded at a faster pace than the ocean and air freight forwarding division in April and May. “The cold supply-chain segment has actually shown better growth than during the pandemic, owing to increased demand for frozen food, as people stock up food after recent cases of avian flu were reported in several countries,” he says.

Tasco is not stopping its expansion just yet as it undergoes a phase transition called “efficiency development”, where it will relook at its existing warehouse facilities to increase capacity, as it has done to SALC.

“We will not be aggressively buying land. Instead, we will try to look at our existing land and restructure the buildings to make it more efficient and ESG (environmental, social and governance) compliant,” says Andy.

Tasco was one of eight new additions to the constituents of the FTSE4Good Bursa Malaysia Index recently. The index measures the performance of public-listed companies that demonstrate strong ESG practices.

“Outside of this list of improvements which comprises five projects, including Phase 2 of SALC [to build another 500,000 sq ft of warehouse space] and expansions in Kuching and Penang, we intend to relook at our existing [parcels of] land, whether we need to tear the existing warehouses down and rebuild them. All these plans are being evaluated and, once approved, we will probably need to commit investment in capital expenditure (capex) of another RM300 million,” Andy says.

Tan says the RM300 million of additional capex is still being considered. So far, the company has been using mainly bank borrowings and internal funds. As at March 2023, it had a relatively strong balance sheet, with a gross gearing ratio of 0.4 times. It had cash of RM241.14 million against RM282.92 million in borrowings.

According to Tan, the group expects to cap its net gearing ratio to one time. Thus, this implies ample debt headroom to undertake its expansion plans.

Tan also points to the savings from lower tax payments via the investment tax allowance granted by the Malaysian Investment Development Authority of 60% on qualifying capex incurred within five years, which is estimated at RM60 million.

Meanwhile, Andy notes that the group continues to be on the hunt for the right acquisition targets. Its latest acquisition was in 2021, when its 70%-owned unit Tasco Yusen Gold Cold Sdn Bhd bought a 50% stake in Sabah-based Hypercold Logistics Sdn Bhd for RM10.55 million. Swift Haulage Bhd owns the remaining 50%.

He says: “We are always on the lookout. We would like to either acquire or enter into a joint venture with companies in areas that we are not in. It could be geographical or services that we don’t have. For example, there are subsectors like information technology companies that are serving the logistics industry.

“We won’t say no [to the acquisition of companies in the same business], but I would prioritise those in services or areas that we are not in. That’s because we are confident that we can still grow our business organically.”

Bloomberg data shows that three of four analysts covering Tasco are recommending a “buy” while one has a “hold” call, with a consensus 12-month target price of RM1.59 per share. This implies a potential upside of 88% from Wednesday’s close of 84.5 sen.

In March 2021, Tasco had completed a one-for-four share split. Before the split, Tasco shares were trading at RM3.83. 

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