Defying Valuations With Its Earnings Trajectory

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Company Update, 24 March 2015

GD Express Courier (GDX MK) Buy (Maintained) Transport - Logistics Target Price: MYR2.05

Market Cap: USD540m Price: MYR1.66

Defying Valuations With Its Earnings Trajectory

Macro

3.00

Risks

2.00

Growth

3.00

Value

3.00

92

97

101

106

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115

119

124

128

133

137

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

1.70

GD Express Courier (GDX MK)Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)

1122334455

Ma

r-1

4

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Source: Bloomberg

Avg Turnover (MYR/USD) 0.66m/0.18m

Cons. Upside (%) 12.7

Upside (%) 23.7

52-wk Price low/high (MYR) 1.27 - 1.67

Free float (%) 27

Share outstanding (m) 1,201

Shareholders (%)

GD Express (M) SB 31.1

Singapore Post 24.2

GD Holdings International 9.7

Share Performance (%)

YTD 1m 3m 6m 12m

Absolute 5.4 5.7 7.4 8.5 22.2

Relative 3.0 6.0 4.3 10.5 23.1

Shariah compliant

Ahmad Maghfur Usman 603 9207 7654

[email protected]

Forecasts and Valuations Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Total turnover (MYRm) 135 159 204 258 319

Reported net profit (MYRm) 13.6 23.4 30.5 41.3 56.6

Recurring net profit (MYRm) 14.5 23.2 30.5 41.3 56.6

Recurring net profit growth (%) 65.7 59.8 31.5 35.5 36.9

Recurring EPS (MYR) 0.02 0.03 0.02 0.03 0.05

DPS (MYR) 0.01 0.01 0.01 0.01 0.02

Recurring P/E (x) 89.7 58.3 67.7 50.0 36.5

P/B (x) 20.0 13.9 16.1 13.3 10.8

P/CF (x) 76.5 50.8 65.5 49.0 36.1

Dividend Yield (%) 0.7 0.7 0.5 0.7 1.0

EV/EBITDA (x) 48.5 42.8 46.8 35.4 26.3

Return on average equity (%) 23.2 28.8 27.1 29.2 32.6

Net debt to equity (%) 12.7 net cash net cash net cash net cash

Our vs consensus EPS (adjusted) (%) 0.0 0.0 0.0

Source: Company data, RHB

GDEX’s exposure in the growing online retail industry (which accounts for just 10% of total revenue) is still at an early stage. BUY with a higher MYR2.05 TP (24% upside), assuming a slightly higher 6.9% WACC. In view of its aggressive expansion ahead, we lift our FY15F-17F earnings by 10%/19%/27%. GDEX could bear more fruit ahead as its capex outlay relative to its strong operating cash flow churn is minimal.

Riding on the eCommerce bandwagon. While 40% of GD Express

Courier’s (GDEX) volume comprises household products, only 10% of its total volume handled is from business-to-consumer (B2C) customers like Lazada, Zalora and Go Shop, Astro’s Home TV shopping arm. As online retail continues to grow, we believe GDEX is poised to be on a growing earnings trajectory ahead. Astro, which kicked off Go Shop in Nov 2014, is becoming one of its fastest-growing customers and could become a Top 5 customer if its home-shopping business does well going forward.

Forecasts. In view of GDEX’s aggressive expansion ahead, we lift our

volume projections for FY15/FY16/FY17 by 12%/25%/37% which, coupled with the expectation of further improvement in its operating efficiency and lower petrol pump prices, have led us to increase our earnings projections by 10%/19%/27% respectively.

A cash cow. We expect GDEX’s outlook to be rosy ahead with very

minimal capex outlay relative to its strong operating cash flow churn. As it could be embarking on an exponential growth trajectory, dividends could be minimal for now but as the courier industry matures eventually without needing any major capex, GDEX’s payout ratio could potentially increase from 35% currently.

Still a BUY, but with a higher TP. We maintain our BUY

recommendation. Following the upward revision in earnings, our TP rises to MYR2.05 (from MYR1.82), premised on a slightly higher WACC of 6.9% (from 6.8% earlier). GDEX’s share price has defied all price-relative valuation metrics. Its average trailing P/E (for four quarters) since 2005 has hovered around 61.4x. Given its expected earnings growth, superior ROEs and strong free cash flow growth trajectory, we deem as reasonable its high P/E multiple.

Risks. The industry is competitive which could impact pricing; any

economic slowdown may result in lower business volumes.

http://www.efa.biz/

GD Express Courier (GDX MK)

24 March 2015

See important disclosures at the end of this report 2

ASEAN eCommerce: How Far Is The Horizon? eCommerce about to take off in ASEAN. eCommerce has revolutionised retail

markets globally, and is here to stay. Its growth surged in China, now the world’s largest online retail market, and is still poised to expand by a 24% CAGR until 2018. In ASEAN, online retailing is still at a nascent stage, making up less than 1% of total retail sales. We believe it is about to take off, although growth is likely to be more gradual.

Running along speedbumps. Save for Singapore, internet and smartphone

penetration rates in ASEAN countries are still lagging behind markets like China. The lack of “trust” in online transactions is another impediment to eCommerce. Critically, it is difficult for eCommerce players to achieve profitable scale with their high overhead business model, owing to intra-ASEAN trade tariffs and legislations. We believe the move towards ASEAN integration will be a boon for eCommerce players

Philippines and Vietnam have substantial potential. In our view, these two

markets display a strong potential for eCommerce to grow. The Philippines has the youngest median age (23 years) in ASEAN – and 44m active internet users, the second largest in the region. Vietnam already has a relatively high internet penetration rate of 47% and the number of local start-ups is expanding rapidly.

Negative impact on discretionary retailers. eCommerce will have a negative

impact on discretionary retailers, in products such as apparels and electronics which target mid-higher end consumers, in our view. Hence, we are wary of the long-term prospects for retailers which are not brand owners, as they are at risk of disintermediation and competition from online counterparts. Online grocery retailers on the other hand, are unlikely to achieve sufficient scale to challenge brick-and-mortar counterparts for the foreseeable future, in our view.

The above are the key summaries of our ASEAN e-commerce report dated 2 Feb 2015. For full report, please click: How Far Is The Horizon?

Figure 1: Top 5 Countries, ranked by eCommerce sales Figure 2: ASEAN internet retailing as a % of total retail sales

USD b 2013 2014F 2015F 2016F 2017F 2018F

1. China 315.8 426.3 562.7 714.6 871.8 1011.3

% chg 47.0% 35.0% 32.0% 27.0% 22.0% 16.0%

% of total retail sales 8.3% 10.1% 12.0% 13.8% 15.5% 16.6%

2. US 264.3 305.7 349.1 394.4 442.6 493.9

% chg 16.5% 15.7% 14.2% 13.0% 12.2% 11.6%


3. UK 70.4 82.0 93.9 104.2 114.6 125.0

% chg 17.0% 16.5% 14.5% 11.0% 10.0% 9.0%


4. Japan 62.1 70.8 79.3 88.1 96.9 106.1

% chg 17.9% 14.0% 12.0% 11.0% 10.0% 9.5%


5. Germany 51.9 63.4 73.5 82.9 92.0 99.3

% chg 21.7% 22.1% 15.9% 12.9% 10.9% 8.0%

Title:

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Please fill in the values above to have them entered in your report

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Singapore Malaysia Thailand Indonesia Philippines Vietnam

%

Source: eMarketer 2014 Source: Euromonitor 2014

http://rhbosk.ap.bdvision.ipreo.com/NSightWeb_v2.00/Handlers/Document.ashx?i=4d002366445b4b5ab3673334c75113fe


24 March 2015


Figure 3: Internet penetration rates in ASEAN and the USA Figure 4: Potential online retail market sizes in ASEAN*

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74.269.4

30.6

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Source: Euromonitor 2014 Source: Euromonitor 2014

* assuming online retail hits 5% of current total retail sales

Figure 5: Per cent (%) of population that made an online purchase in the past month

Figure 6: Online retail top categories - Consumers more likely to browse and purchase non-consumables online*

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%

Category Buy Browse

Clothing, Accessories and Shoes 57 49

Airline tickets 59 43

Tour & Hotel 53 44

Event ticket 50 39

Hardcopy book 50 40

Mobile phone 44 39

E-books 43 39

Cosmetics 43 39

Personal Care 43 38

Electronic Equipment 41 43

*Survey for intentions over next 6 months Source: Nielsen’s global survey Aug 2014

Source: We are Social Jan 2015 Survey

A growing sector. The courier segment has grown tremendously over the years.

Since data was compiled back in 2001 by the Malaysian Communications and Multimedia Commission (MCMC), the industry’s annual revenue accumulated by the top 10 courier companies has grown to total revenue of MYR2.187bn in 2013 from only MYR954m in 2001, representing a CAGR of 7.2%. Volume wise, the sector has seen a CAGR of 11.2% since 2005 on documents couriered while the number of parcels has grown at a CAGR of 9.4% over the same period. The growing volume from courier activities reflects the rising need for urgent and secure shipments on the back of the broader economic growth. Coupled with technological advancement in the digital age, this has also propelled the growth of online retail shopping.


24 March 2015


Figure 7: Documents and parcels handled by the courier industry

Figure 8: Revenue of the top 10 courier players in Malaysia (MYRm)

Title:

Source:


15.1 14.8 15.4

23.726.2

27.929.3

30.432.7

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13.7 12.714.6

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Documents handled (m) Parcels handled (m)

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9541049 1079 1099

1297

15501625

1511 1491

1737

20302105

2187

0

500

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2001200220032004200520062007200820092010201120122013

Source: MCMC Source: MCMC

Figure 9: Number of courier licenses Figure 10: Market share of the top 10 courier players (by revenue)

Title:

Source:


115 117110

114 112 114109

113105

112108 105

93 93

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24%

15%

12%

7%

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5%

4%

2% 2%

DHL Fedex UPS Pos Laju TNT

City Link GD Express Nationwide Skynet ABX

Source: MCMC Source: MCMC

Figure 11: Quarterly YoY revenue growth rates since 2009 Figure 12: Quarterly revenue (MYRm) of the three listed courier companies

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Nationwide GD Express Pos Laju

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Nationwide GD Express Pos Laju

Source: RHB, Company data Source: RHB, Company data


24 March 2015


Online shopping has yet to come in a big way. Over the recent years, driving

volume growth for the sector has been increasing the number of online retail shopping activities, which require the last mile delivery to the customers’ doors. These deliveries can be channeled through two different platforms:

1) Business to Customers(B2C): the online shopping delivery experience, where a customer (as the end user) would purchase from a company (ie online retailer) and have their purchased goods delivered to their doorstep. These kind of delivery methods have been growing significantly with the rise of online retailers such as Lazada, Zalora, Groupon, Rakuten, MySales.com etc.

2) Customers to Customers (C2C): the online shopping experience where two customers trade with each other. This has been the driver for online auctions and classifieds, which play a prominent role on the rise of online classified platforms such as eBay, lelong.com and mudah.my.

The rapid growth of these two segments requires last mile delivery to the customers’ doorsteps. This has built up the need of having to outsource delivery services to courier providers, as this would be a more feasible avenue given the massive capex outlay and costs required if one were to set up its own in-house fleet of trucks.

The growth in the online retail shopping segment from both B2Cs and C2Cs has been the driving force of the growing courier delivery industry. While there is no valid data on how much these online retail sales contribute to total deliveries, according to GDEX, household goods represent as much as 40% of their total deliveries.

With Malaysia seeing only 0.9% of its retail sales transacted online currently (as of 2014), and as more middle-income households are created coupled with the improved smartphone penetration rate, we think Malaysia is well positioned to post further growth in the online retail sales segment to potentially position itself where Singapore is. Singapore is currently seeing almost 3.4% of its total retail sales transacted online. This essentially means that Malaysia’s online retail shopping market could more than triple if it accounts for at least 3% of the total retail online shopping market.

Another driving force that could propel the industry growth of the courier segment is if the traditional brick and mortar retail outlets start to expand its distribution channels online. A research revealed by Ecommercemilo.com reveals that only 16 (accounting for 44%) of the top 36 retail brands have setup their own online shopping portals.


24 March 2015


Figure 13: Top retail brands in Malaysia

Category Retailer Own Online Store

Giant No

Tesco Yes

AEON Big No

7-Eleven No

KK Super Mart No

99 Speedmart No

AEON No

Parkson Yes

The Store No

Padini No

Bata Yes

Kamdar No

Senheng Yes

Harvey Norman Yes

Best Denki No

Guardian Yes

Watsons Yes

Caring Pharmacy No

The Body Shop Yes

Sa Sa Yes

L'Occitane Yes

IKEA No

Courts Yes

ACE Yes

Poh Kong No

Tomei Yes

City Chain No

Popular No

MPH Yes

Borders Yes

PetsMore.com Yes

Pets Wonderland No

Pets Lover Centre No

Al Ikhsan Sports Yes

Takasima Yes

Royal Sporting House No

Sports

Grocery

Convenience Store

Departmental Store

Apparel & Footwear

Electronics & Appliance

Health & Beauty

Beauty Specialist

Home & Garden

Jewellery & Watch

Bookstore

Pet

Source: Ecommercemilo.com


24 March 2015


GDEX And Its Aggressive Expansion Plans Ahead Riding on the eCommerce bandwagon. Although 40% of GDEX’s volume is

comprised of household-related goods that are delivered to customers’ doorsteps, only 10% of its total volume handled is from B2C customers such as Lazada, Zalora, Astro TV shopping. Meanwhile, the rest is likely to be household goods delivered for customers that are transacted on C2C platforms such as marketplaces (ie eBay, lelong.com, etc.) and also deliveries to customers for gift redemptions.

Figure 14: Top online shopping and marketplace sites accessed by shoppers in Malaysia

Website Website

ranking in

Malaysia

Daily

Pageviews

per Visitor

Daily Time

on Site

Delivery provider partner

Lazada.com.my 12 8.5 6.53 GDEX, TA-Q-BIN

Amazon.com 17 11.21 10.55 Depending on supplier

Lelong.com.my 23 9.1 4.59 Depending on supplier

Alibaba.com 42 4.64 3.43 Depending on supplier

Ebay.com 54 13.47 13.18 Depending on supplier

Taobao.com 60 9.6 9.16 Depending on supplier

Ebay.com.my 100 9.9 4.32 Depending on supplier

Zalora.com.my 105 7.5 6.04 GDEX, TA-Q-BIN

Aliexpress.com 129 9.2 7.08 Depending on supplier

Rakuten.com.my 153 9.7 5.17 Pos Laju, GDEX, TA-Q-BIN

hulala.com.my 156 14.4 10.35 Depending on supplier

Tesco.com.my 196 10.7 8 In-house delivery

qoo10.my 202 3.2 3.53 Depending on supplier

tmall.com 249 5.48 5.42 Depending on supplier

ensogo.com.my 286 5 6.1 Depending on supplier

mysale.my 287 7.5 6.13 Depending on supplier

Source: RHB compilation based on publicly available data

We noticed a major competitor in the online retail shopping space for GDEX is TA-Q-BIN, a courier company from Japan’s Yamoto Holdings. While the carrier is an established player in Japan, we gather that TA-Q-BIN is a relatively small player in Malaysia. Based on our checks with the Companies Commission of Malaysia (SSM), it only generated MYR35.6m in revenue and is currently loss-making with a reported net loss of MYR12.58m as of FY14 (FYE Jun).

Astro could potentially emerge as a stronger customer. Astro, which has

commenced its home shopping channel (GO Shop) since Nov 2014, is becoming one of the fastest-growing customers of GDEX, potentially emerging as one of its top five customers if its Go Shop venture does remarkably well in the future.

Astro’s home shopping venture is a JV partnership (60% owned by Astro) with Korea’s GS Home Shopping (remaining 40% share), a leading home shopping retailer in Korea. As of its official launching date on 30 Jan, GO Shop has already attracted 72,000 customers and sold 118,000 products since the soft launch on 1 Nov 2014. Current sales are also understood to be averaging between MYR200,000-MYR500,000 daily at an average price of MYR200-MYR300 per item. From 60 products for sale by Go Shop in late January, this has increased to 75 with plans to double it within the year. Of the 75 products available for sale, 21 of them are household items.

Currently, the TV shopping channel is dedicated to the Malay market given that its home shopping is only conducted in Bahasa Malaysia. We understand that Astro will eventually conduct its promotions in other languages such as English and Mandarin.

Astro targets to eventually generate MYR500m in annual revenue within five years. At the initial stage, leveraging on its core strength in subscription TV, contribution would mostly be from its home shopping channel but eventually Astro would expect more contributions from its online platforms as a growing potential. Based on GS Home Shopping most recent presentation, 60% of its customers in its core market - South Korea - are from the TV audience, followed by 25% orders made through PC, with 9% and 4% respectively coming from Mobile and Catalogs. Coming from a small base and potentially due to cannibalisation from the TV segment, shopping on Mobile has grown to be more popular, as witnessed by GS Home Shopping. We think it is still too early to tell how successful GO Shop could be in Malaysia, noting the likely decline in TV viewership as online streaming becomes increasingly popular in our


24 March 2015


view. Furthermore, we also noted that China is GS Home Shopping’s only profitable market, while the rest remains loss making.

Fleet expansion and raising its capacity further. We understand that management

is currently looking to increase its total parcel sorting capacity up to 150,000 daily in the coming years from an expected 100,000 daily this year. This expansion will potentially see the set up of two new hubs (one Northern and one Southern region) from the current one it operates in Petaling Jaya, Selangor. This expansion will likely enhance the room for further network optimisation rather than having all shipments centralised into one hub, thus, allowing greater operational cost savings. We understand that most of the capacity expansion will be at its current hub in Petaling Jaya, given that most of its volume is still within the Klang Valley. GDEX also owns an unutilised landbank of 40,000 sqf next to its existing operations for this expansion. Annual capex targeted by management is expected to be within MYR15m-20m. Our forecasts work out a total capex of MYR55m for FY15F to FY18F.

Figure 15: Tonnage handled Figure 16: Daily Sorting Capacity ('000 items)

Title:

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15,42217,81520,457

23,99027,786

33,766

43,413

53,865

65,603

78,385

86,827

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30 30 30

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72 72

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Source: RHB, Company Source: RHB, Company

The management expects the carrier to expand its lodge in centers (currently at 22 centres) to grow its customer reach, although we understand that GDEX has no intention to grow its network visibility to compete against Pos Malaysia’s large network base of postal offices. In view of its hub expansions, fleet count (currently at 509 trucks) will also increase in tandem, which we expect could potentially grow to 682 by 2020. Note that GDEX also has 2,570 motor bikes in its fleet although most are owned by its delivery workforce.

Room to grow for revenue. GDEX is also looking to generate additional revenues

by offering other services such as insurance coverage and cash on delivery collection on home delivered goods. GDEX tends to be very selective in securing new accounts as it does not want to compromise timely delivery of products at the expense of market share. Based on our personal experience, timeliness in the delivery of goods can greatly enhanced one’s online shopping experience.

Collaboration with SingPost and potentially Alibaba. One of GDEX’s major

shareholders is SingPost (with a 24.2% shareholding), which emerged as a major shareholder back in 2011. SingPost, in turn, also saw the entry of Alibaba as its shareholder with a 10.35% stake back in late May 2014. While it has been four years since SingPost became a shareholder, we noticed that volume contribution between GDEX and SingPost is still very minimal. According to the related party transactions disclosure in its FY14 annual report, GDEX only saw MYR349,900 in revenue derived from SingPost, although this has almost doubled from MYR183,400 in FY13. We understand that these transactions were done at arm’s length basis. Alibaba has yet to make its foray into the Malaysian market but last month, it had opened a dedicated online shopping portal to serve the Indonesian market with a tie-up between Pos Indonesia and SingPost. We believe it is only a matter of time before Alibaba would serve the Malaysian market in a bigger way eventually.


24 March 2015


Regional expansion. Management has always expressed its desire to expand

overseas. Its first initial potential foray was back in 2009, where Laos would be marked as its first attempt at overseas expansion. The MoU was to partner with Laos' national postal company, Enterprise Des Postes Lao (EPL) to develop international and domestic express delivery services under shared brands for the Laotian market. However, due to the policy risks involved as a foreign entity and noting that GDEX was unable to take a controlling stake, the venture was called off. This demonstrates that management does take a cautious approach to its expansion overseas. In the near term, the express carrier cited the possibility of Indonesia and Thailand as two potential markets to tap into, with the former being a current priority. We understand this expansion could likely be in the form of an acquisition.

Indonesia’s courier industry has grown by a CAGR of 16% from 2007 – 2012 and is expected to grow 12% from 2012 – 2018, according to a research by Euromonitor back in Dec 2013. The growth is mainly driven by B2B transactions and we expect the improved internet literacy and penetration to drive online retail shopping activities at key metropolitan cities in the country. Euromonitor also observed that the logistics sector is a very lucrative sector, where profit margin can be as high as 50%. Given its archipelago geography, the industry is very fragmented. Like most shareholding policies in many ASEAN nations, foreigners are only restricted to a 49% ownership. According to the Indonesian Courier and Cargo Association (Asperindo), there are currently 167 express postal carriers in Indonesia (data updated as of Jul 2013).

Given the poor infrastructure in Indonesia, delivery time for express courier services is typically much longer compared with other neighbouring countries. We understand that shipments to Indonesia for purchases made through Aliexpress.com, Alibaba’s worldwide online shopping portal could take as long as 35 days or even more.

Earlier last month, SingPost and AliExpress have tied up with Pos Indonesia to improve delivery speed for products delivered to Indonesia. It targets to reduce delivery time to two weeks. It remains to be seen whether GDEX would play a role in this tie-up. As it is, we understand that GDEX is already in a working relationship with Pos Indonesia as a last mile delivery courier provider in Malaysia. Potential ventures in Indonesia could be in the form of a tie-up with a local partner through a 49% acquisition, as this would give GDEX an immediate footing in Indonesia.

While we are aware of the risks on such venture, we think GDEX would take a cautious approach to any form of regional expansion, as it had in the past when the express carrier tried to venture into the Laos market. Funding for its regional expansion should come from a private placement exercise, which management expects to raise as much as MYR200m. We understand that the exercise will be on a tiered basis instead of a one-shot placement exercise.


24 March 2015


Forecasts Upgrading earnings. We revisit our earnings model in view of GDEX’s aggressive

expansion in going forward. Given the upcoming capacity increase, coupled with the growing volume base from its B2C online retail shopping platforms - which currently only contribute 10% in FY14 revenue - we expect volume growth to remain strong. GDEX’s volume is projected to grow 29%/24%/22% in FY15/FY16/FY17 respectively. Coupled with the economies of scale achieved on the higher volume churned as well as lower petrol pump prices; this should potentially give further boost to margins and earnings ahead.

In Figure 17 we show the changes to our earnings forecasts; since we have raised volume projections for FY15/FY16/FY17 by 12%/25%/37%, coupled with the improved operating efficiencies to be achieved and lower petrol pump prices, our earnings projections are consequently raised by 10%/19%/27% respectively.

Figure 17: Changes to earnings forecasts and assumptions

Source: RHB

A cash cow business. Having invested over MYR42m from FY05 to FY14, GDEX

has been able to generate MYR61m in additional free cash flow on the back of total revenue of MYR366.2m over the same period. We envision GDEX bearing more fruit ahead with very minimal capex outlay relative to its strong operating cash flow churn. While GDEX is embarking on an exponential growth trajectory, dividends will be minimal for now but as the industry matures eventually, the payout ratio could potentially increase from the current payout ratio of 35%. Port operators that have stable cash flow such as Westports (WPRTS MK, BUY, TP: MYR3.96) are dishing out a 75% dividend payout ratio.

Previous Revised % chg from previous forecast

FY14 FY15F FY16F FY17F FY14 FY15F FY16F FY17F FY15F FY16F FY17F

Average volume per day 42,000 48,240 53,600 59,400 42,000 54,000 67,000 81,600 12% 25% 37%

Growth (% chg YoY) 15% 11% 11% 29% 24% 22%

Revenue (MYRm) 158.703 181.857 208.481 237.772 158.703 204.267 258.349 319.101 12% 24% 34%

Diesel price assumption (MYRm) 2.1 2.2 2.3 2.4 2.1 2.0 2.25 2.3 -9% -2% -4%

Core net income (MYRm) 23.1905 27.6438 34.8062 44.6243 23.1905 30.5128 41.335 56.5831 10% 19% 27%

Growth (% chg YoY) 19% 26% 28% 32% 35% 37%


24 March 2015


Valuation And Recommendation Defying gravity. GDEX’s stock price has defied all price relative valuation metrics.

Its average trailing four quarter P/Es since 2005 has hovered at 61.4x. Given the earnings and free cash flow growth trajectory, we deem this justifiable coupled with its superior ROEs averaging at 20% over the past five years. GDEX’s possible closest competitor would be Nationwide (NAT MK, NR), which is trading at 52x trailing four quarters P/E. It has been loss making over the past two FYEs, raking in a ROE average of between 1-2% in the past five years, despite the steady revenue growth. That said, it posted a much lower revenue growth rate compared with GDEX. Another possible close competitor in the niche express carrier play on the international level is Yamoto Holdings (9064 JP; NR), which trades at 30x FY15 P/E (FYE March). Yamoto’s low P/E is justifiable in our view, given that it operates in a mature market (Japan) and it also has low ROEs.

Maintain BUY at a higher TP. We maintain our BUY recommendation. Following the

upward revision in earnings, our TP is consequently raised to MYR2.05 (from MYR1.82), premised on a slightly higher WACC of 6.9% (from 6.8% earlier). Our TP results in an implied FY16 P/E of 62x which is almost in line with its historical average. While our assumption of a terminal growth rate of 3.8% may seem high, we believe this is reasonable if one were to quantify the long-term GDP growth with the combination of a multiplier effect from the growing trend of online retail shopping ahead. Our sensitivity analysis of various terminal growth rates to GDEX’s potential TP is also illustrated below.

Figure 18: GDEX's DCF-derived TP (all figures MYRm unless stated otherwise)

FY14 FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F

Tonnage handled (tonnes) 33,766 43,413 53,865 65,603 78,385 86,827 95,268 100,333 105,479 111,910 123,809 132,652 137,958

Revenue 159 204 258 319 390 440 493 529 567 607 678 733 770

EBITDA 32 44 57 76 108 131 155 168 183 194 218 235 242

Core net income 23 31 41 57 73 90 108 118 128 136 154 166 171

Operating cash flow 27 32 42 55 69 91 109 123 134 142 154 170 180

Capex (4) (10) (15) (20) (10) (15) (10) (20) (20) (20) (30) (20) (20)

Free cash flow to firm 23 22 27 35 59 76 99 103 114 122 124 150 160

Period 1 2 3 4 5 6 7 8 9 10 11

PV to free cash flow 21.9 24.8 30.9 48.2 58.3 70.8 69.4 71.7 71.7 68.0 77.2 77.0

Total PV of free cash flow 679.0

Terminal value at 3.8% growth 3,803.6

PV of terminal value 1834.0

Net cash 41.4

Total equity value 2,554.4

Number of shares after conversion of warrant A (m) 1244.1

TP 2.05

WACC computation

Risk free rate 3.8%

Market risk premium 5.5%

Beta 0.80

Cost of equity 8.2%

After-tax cost of debt 4.9%

Long term weightage for equity 60.0%

Long term weightage for debt 40.0%

WACC 6.9%

Terminal growth rate 3.80% Source: RHB

Figure 19: Sensitivity of TP to WACC and the terminal growth rate

Source: RHB

1.8% 2.8% 3.8% 4.8% 5.8%

WACC 8.9% 1.32 1.48 1.72 2.09 2.78

7.9% 1.44 1.62 1.88 2.29 3.05

6.9% 1.57 1.77 2.05 2.51 3.36

5.9% 1.71 1.93 2.25 2.76 3.69

4.9% 1.87 2.12 2.47 3.03 4.07

Terminal growth rate


24 March 2015


Financial Exhibits

Profit & Loss (MYRm) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Total turnover 135 159 204 258 319

Cost of sales (27) (34) (45) (55) (63)

Gross profit 108 125 159 203 256

Gen & admin expenses (70) (81) (99) (122) (151)

Other operating costs (16) (19) (24) (32) (39)

Operating profit 22 25 36 49 67

Operating EBITDA 27 31 43 57 76

Depreciation of fixed assets (5) (6) (7) (8) (10)

Operating EBIT 22 25 36 49 67

Interest income 0 1 1 1 1

Interest expense (1) (1) (1) (1) (1)

Exceptional income - net (1) 0 - - -

Pre-tax profit 19 24 36 49 67

Taxation (6) (1) (5) (7) (10)

Profit after tax & minorities 14 23 31 41 57

Reported net profit 14 23 31 41 57

Recurring net profit 15 23 31 41 57


Cash flow (MYRm) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Operating profit 22 25 36 49 67

Depreciation & amortisation 5 6 7 8 10

Change in working capital (5) (4) (7) (9) (12)

Other operating cash flow 1 2 0 1 2

Operating cash flow 23 29 37 50 67

Interest received 0 1 1 1 1

Interest paid (1) (1) (1) (1) (1)

Tax paid (4) (2) (5) (7) (10)

Cash flow from operations 17 27 32 42 57

Capex (5) (4) (10) (15) (20)

Other investing cash flow 1 1 1 1 1

Cash flow from investing activities (4) (3) (9) (14) (19)

Dividends paid (3) (0) (11) (14) (20)

Proceeds from issue of shares 2 9 5 (6) (6)

Increase in debt (5) (7) 1 1 1

Other financing cash flow (2) 2 (4) (4) (4)

Cash flow from financing activities (8) 4 (9) (24) (29)

Cash at beginning of period 12 18 42 59 67

Total cash generated 4 27 13 5 9

Implied cash at end of period 17 45 56 64 77



24 March 2015


Financial Exhibits

Balance Sheet (MYRm) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Total cash and equivalents 18 42 59 67 78

Inventories 1 1 2 2 3

Accounts receivable 30 32 41 52 64

Other current assets 4 6 8 10 12

Total current assets 53 82 110 131 157

Tangible fixed assets 32 36 43 55 69

Total other assets 22 22 21 21 20

Total non-current assets 54 58 64 75 90

Total assets 107 140 175 207 247

Short-term debt 7 4 4 4 4

Accounts payable 3 4 5 7 7

Other current liabilities 10 10 13 17 19

Total current liabilities 21 19 23 27 31

Total long-term debt 19 21 21 21 22

Other liabilities 2 3 3 3 3

Total non-current liabilities 21 24 24 24 25

Total liabilities 42 42 47 52 55

Share capital 26 42 45 45 45

Retained earnings reserve 36 55 83 110 147

Other reserves 3 - - - -

Shareholders' equity 65 97 128 155 192

Total equity 65 97 128 155 192

Total liabilities & equity 107 140 175 207 247


Key Ratios (MYR) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Revenue growth (%) 16.2 17.4 28.7 26.5 23.5

Operating profit growth (%) 57.3 14.7 46.3 35.2 36.2

Net profit growth (%) 55.6 71.8 30.5 35.5 36.9

EPS growth (%) (49.0) 65.4 (14.5) 35.5 36.9

Bv per share growth (%) (59.1) 44.0 (13.8) 21.0 23.7

Operating margin (%) 16.0 15.6 17.7 19.0 20.9

Net profit margin (%) 10.1 14.7 14.9 16.0 17.7

Return on average assets (%) 13.4 18.9 19.4 21.7 25.0

Return on average equity (%) 23.2 28.8 27.1 29.2 32.6

Net debt to equity (%) 12.7 (17.5) (26.7) (26.7) (27.2)

DPS 0.01 0.01 0.01 0.01 0.02

Recurrent cash flow per share 0.02 0.03 0.03 0.03 0.05



24 March 2015


SWOT Analysis

Good management as evidenced by the steady growth in earnings over the past 10 years

High staff productivity translates into high profit margins

A surge in operating expenses (mainly fuel costs) could dampen its earnings

The e-commerce boom in the region could help drive its business volume

Unattractive valuation in terms of P/E

Operating in a highly competitive and fragmented industry

-60%

-37%

-13%

10%

33%

57%

80%

0

20

40

60

80

100

120

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/E (x) vs EPS growth

P/E (x) (lhs) EPS growth (rhs)

0%

7%

14%

21%

28%

35%

0.0

5.0

10.0

15.0

20.0

25.0

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/BV (x) vs ROAE

P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, RHB Source: Company data, RHB

Company Profile GD Express Courier (GDEX) is the leading express delivery company in Malaysia and is currently entering the third-party logistics (3PL) business.


24 March 2015


Recommendation Chart

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Mar-10 Jul-11 Oct-12 Jan-14

Price Close

na

2.4

2

1.8

2 Recommendations & Target Price

Buy Neutral Sell Trading Buy Take Profit Not Rated

Source: RHB, Bloomberg

Date RecommendationTarget Price Price

2015-02-13 Buy 1.82 1.61

2014-11-12 Buy 2.42 1.57

Source : RHB, Bloomberg

16

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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