KUALA LUMPUR (July 18): Two research houses are optimistic about KGW Group Bhd’s future prospects, ahead of its tentative listing date on the ACE Market of Bursa Malaysia on Aug 1.
The ocean freight company set its initial price offering (IPO) price at 21 sen, seeking to raise RM16.73 million from the sale of 79.66 million new shares, which represents 16.5% of KGW’s enlarged share capital.
Meanwhile, existing shareholders are also conducting an offer for sale of 43.45 million existing shares, or 9% of the enlarged share capital, which is expected to raise gross proceeds of RM9.12 million.
RHB Investment Bank assigned a fair value (FV) of 23 sen, a 9% premium from its IPO price, representing a price-earnings (P/E) multiple of 12.2 times its financial year ending Dec 31, 2024 (FY2024).
In a research note on Monday (July 17), the research house added that it expects the group’s expertise in long-haul shipments and growing warehouse segment to propel its three-year earning compound annual growth rate (CAGR) of 11% from 2023 to 2025.
Meanwhile, between 2019 and 2022, KGW registered a three-year CAGR revenue growth of 74%, owing to stellar performances from their ocean freight segment, which is their main source of revenue.
Part of KGW’s expansion this year includes its new three-storey office building of 16,500 square feet with an annexed two-storey warehouse of 36,900 square feet, both currently under construction and slated to be ready by the fourth quarter of this year.
RHB Research analyst Alexander Chia anticipates the new warehouse to yield higher margins through higher rental rates, and will enable the group to centralise its entire operations.
As such, Chia expects the warehouse division to register three-year revenue CAGR of c.29% during 2023 to 2025.
However, the analyst believes that the freight market will remain challenging due to sharp corrections in ocean freight rates since the third quarter of 2022, on decreasing demand, destocking and ramping up of ocean capacities.
Nonetheless, higher-than-normal jet fuel prices may shift preferences back towards ocean freight, thanks to its affordability.
Additionally, KGW also holds a circa 18-year track record in arranging and coordinating ocean shipments between Malaysia and various US ports, as well as a registration as a Non-Vessel Operating Common Carrier (NVOCC) with the US Federal Maritime Commission.
Chia estimates the twenty-foot equivalent unit (TEU) volume for FY2023-(FY)2025 to grow within an 8%-15% range.
“Our valuation basis was circa 10% lower than KGW’s local logistics peers, due to its smaller market capitalisation and risk of business concentration in ocean freight,” Chia added.
Meanwhile, Public Investment Bank Bhd (PIVB) assigned a higher FV of 24 sen, based on an eight times P/E (price/earnings) multiple, to its FY2024 earnings per share (EPS) of three sen.
The research house ascribed a four-year CAGR of 17.2% for revenue from FY2020 to FY2024, and a four-year CAGR of 60.2% for net profit.
PIVB’s research team said KGW’s growth will be driven by the centralisation of its entire operations, enlargement of its marketing and business teams, enhancement of its warehousing and distribution capabilities, the expansion of its customer base, and provision of e-commerce solutions.
Meanwhile, PIVB cited Malaysia’s competitive industry, fluctuating ocean freight rates and foreign exchange rates, and the shortage of ocean cargo space as the group’s (KGW’s) key risks.
Other downsides include its dependence on other freight forwarders and suppliers, and customers’ possible direct engagement with other carriers.
From KGB’s expected fundraising of RM16.73 million, the group will be utilising 12.0% and 4.4% of the proceeds for renovation and working capital respectively, and 59.8% for repayment of bank borrowing.