PP 7767/09/2010(025354)

26 August 2010
RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R esults/Briefing No te
26 August 2010
MARKET DATELINE

Freight Management Share Price

Fair Value
:
:
RM0.92
RM1.57
FY06/10 Earnings Rose 21.1% YoY Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (FREIGHT; Code: 7210) Bloomberg: FMH MK

Net Net
FYE Revenue Profit EPS Growth PER C. EPS * P/NTA Gearing ROE GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%)
2010a 265.5 16.4 13.5 21.2 6.8 - 1.2 0.1 17.4 5.4
2011f 277.9 18.7 15.4 13.8 6.0 15.0 1.1 0.1 17.6 6.0
2012f 291.6 19.5 16.0 4.2 5.7 17.0 0.9 Cash 16.4 6.0
2013f 301.6 20.3 16.7 4.0 5.5 - 0.8 Cash 15.3 6.0
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Within expectations. FY06/10 net profit was in line with our and market
RHBRI Vs. Consensus
expectations, accounting for 101.9% and 102.5% of our and consensus full- Above
year forecasts. FY06/10 net profit grew 21.1% from RM13.6m to RM16.4m In Line
mainly due to: (1) contributions from new services (i.e. land freight and Below
haulage) since FY06/09; and (2) Higher contributions for its supporting
Issued Capital (m shares) 121.7
services segment i.e. custom brokerage.
Market Cap (RMm) 111.98
♦ 10-15% earnings growth target in FY06/11. Management has guided Daily Trading Vol (m shs) 0.1
earnings growth target of 10-15% which will be mainly driven by: (1) 52wk Price Range (RM) 0.58 – 1.07
stronger-than-expected demand for international freight services; and (2) Major Shareholders: (%)
higher contribution for its warehouse and distribution division. Chew Chong Keat 26.2
Singapore Enterprise 20.0
♦ Optimistic on the Tug and Barge segment. Freight Management (FM) Yang Heng Lam 18.5
had indicated that currently the segment is facing heavy competition
FYE Jun FY11 FY12 FY13
compounded by excess capacity, witnessed by a 15.4% yoy decline in
EPS Revision (%) 1.7 2.1 -
4QFY06/10. Nonetheless, management is optimistic that the segment will
Var to Cons (%) 2.5 -5.8 -
recover in the next 6-12 months given a more positive recovery especially
in Indonesia and India. Note that FM is expanding into this countries and PE Band Chart
management is targeting a gross profit of RM3-4m for the segment.
♦ Risks. The risks include: (1) the entrance of new players into segments PER = 10x
where FM commands significant market shares, hence affecting FM’s pricing PER = 8x
PER = 6x
power and profitability; and (2) a slower-than-expected recovery in the
global economy.
♦ Forecasts. We have raised our FY11-12 EPS forecasts by 1.7% and 2.1%
respectively mainly to reflect: (1) higher volume (TEU) assumption for sea
freight, airfreight, and land freight divisions; and (2) higher margins Relative Performance To FBM KLCI
assumption for air freight and warehouse and distribution divisions that are
in line with management guidance. We have also introduced our FY13
numbers.
Freight Management
♦ Investment case. We have raised our indicative fair value from RM1.53 to
RM1.57 based on unchanged 10x CY11 EPS to reflect our upward revision in
our earnings forecasts. We continue to like FM for: (1) Its core business, i.e. FBM KLCI
the provision of less-than-container-load (LCL) freight service that is niche
and highly profitable; (2) Its dominance in the sector with an estimated
market share of 30-35% in the LCL sea freight segment in Malaysia; and
(3) The above-trend growth of its LCL business vis-à-vis Malaysia’s already Chye Wen Fei
resilient international trade activities. Maintain Outperform. (603) 92802172
chye.wen.fei@rhb.com.my

Please read important disclosures at the end of this report.

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FY06/10 Results
♦ In line. FY06/10 net profit came in within expectation.
♦ YoY. FY06/10 net profit grew 21.1% from RM13.6m to RM16.4m mainly due to: (1) new business i.e. Less-
than-truckload (LTL) that commenced in 4QFY09, further fueled by slower rail freights due to Thailand issues;
(2) higher contribution from freight services i.e. sea freight (+56.8% yoy) and haulage (+35.0% yoy); and
(3) stronger contributions from its supporting services segment i.e. custom brokerage.
♦ QoQ. 4QFY06/10 net profit increased by 37.3% from RM3.4m to RM4.7m. This was mainly due to: (1) higher
contribution from freight services, mainly sea freight and airfreight; and (2) stronger contribution from its
supporting services segment i.e. warehouse and distribution, and customs brokerage; and (3) higher
operating margins due to higher volume from haulage and custom brokerage which offsets higher costs and
vendor freight rates.

Key-takeaways from analysts’ briefing

♦ 10-15% earnings growth target in FY06/11. Management has guided earnings growth target of 10-15%
which will be mainly driven by: (1) demand for international freight services; and (2) higher contribution for its
warehouse and distribution division.
♦ Poised to secure additional distribution rights. Management plans to expand its warehouse and distribution
division in the coming quarters as it sees greater business opportunity ahead. Already, we understand it is poised
to secure distribution rights for a new customer and is set to increase its warehouse space requirements in
several key locations i.e. Subang and Port Klang. Recall it secured a distribution rights from Sharp to distribute
electrical appliance in 4QFY06/10.
♦ Rail freight remains a thorn in the side but mitigated. While management had indicated that the recent
political turmoil in Thailand had abated, the performance for the segment hit another snag mainly due to: 1)
delays in transit time to 5-7 days and a reduction in runs to 1 per week vs. previously 3 per week; and 2)
locomotive shortages (from the Thailand side). Nonetheless, management highlighted that this will be mitigated
by its land freight segments i.e. Less-than-truckload (LTL). Already, land LCL’s volume has increased to 476 TEUs
in FY10 vs. 109 TEUs in FY09.
♦ Optimistic on the Tug and Barge segment. FM indicated that the segment is facing heavy competition
compounded by excess capacity, witnessed by a 15.4% yoy decline in 4QFY06/10. Nonetheless, management is
optimistic that the segment will recover within the next 6-12 months given a more positive recovery especially in
Indonesia and India. Note that FM plans to expand into these countries and management indicated it is targeting
a gross profit of RM3-4m for the segment.

Risks
♦ Risks to our view. The risks include: (1) the entrance of new players into segments where FM commands
significant market shares, hence affecting FM’s pricing power and profitability; and (2) a sharper-than-expected
downturn in the global economy.

Earnings Forecasts
♦ We have raised our FY11-12 EPS forecasts by 1.7% and 2.1% respectively to mainly reflect: (1) higher volume
(TEU) assumption for sea freight, airfreight, and land freight, but have reduced our rail freight volume
assumptions; (2) higher margins assumption for air freight and warehouse and distribution assumptions to be in
line with management guidance; and (3) higher tax assumptions of 22.0% vs. 18.0% previously. We have also
introduced our FY13 numbers.

♦ Investment Case. We have raised our indicative fair value from RM1.53 to RM1.57 to reflect the upward
revision in our FY06/11-12 earnings forecasts. We continue to like FM for: (1) Its core business, i.e. the provision
of less-than-container-load (LCL) freight service that is niche and highly profitable; (2) Its dominance in the
sector with an estimated market share of 30-35% in the LCL sea freight segment in Malaysia; and (3) The above-
trend growth of its LCL business vis-à-vis Malaysia’s already resilient international trade activities. Maintain
Outperform.

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 26 August 2010

Table 2: Earnings Review (YoY Cumulative)

FYE Jun 2009 2010 % YoY Observations/ Comments
(RMm) 12M 12M Chg
Revenue 229.4 265.5 15.7 Due mainly to upward trend of freight rates which in turn resulted in higher
contribution from the seafreight and airfreight divisions.
Operating profit 20.9 23.2 11.1 Mainly boosted by higher margins from support services – haulage, customs
brokerage and warehouse & distribution services.
Finance costs -1.6 -1.5 -8.9
Associates 0.0 0.0 NM
Pretax profit 19.3 21.8 12.7 Boosted further by lower finance costs.
Tax expense -4.3 -4.7 10.2
Minority interest -1.5 -0.6 -56.7
Net profit 13.6 16.4 21.1 Helped further by a lower effective tax rate.
EPS (sen) 11.1 13.5 21.1

Operating margin (%) 9.1 8.8 -0.4

Pretax margin (%) 8.4 8.2 -0.2
Net profit margin (%) 5.9 6.2 0.3
Effective tax rate (%) 22.2 21.7 -0.5

Table 3: Earnings Review (QoQ)

FYE Jun 2010 2010 2010 2010 % QoQ Observations/ Comments
(RMm) 1Q 2Q 3Q 4Q Chg
Revenue 58.8 65.6 66.5 74.6 12.3 Growth seen in: 1) 16.9% in sea freight; 2) 28.8% in
airfreight; and 3) 14.3% in warehouse and
distribution. However, this was partially offset by
14.3% fall in rail freight
Operating profit 5.8 5.8 4.8 7.0 46.4
Finance costs -0.4 -0.4 -0.3 -0.4 13.5
Associates 0.0 0.0 0.0 0.0 NM
Pretax profit 5.4 5.4 4.4 6.6 48.3 Filtered down from higher operating profit.
Tax expense -1.1 -0.8 -0.9 -1.9 >100
Minority interest -0.4 -0.4 -0.1 0.1 -51.4
Net profit 3.8 4.2 3.4 4.7 27.0 Moderated by higher tax expense.
EPS (sen) 3.2 3.5 2.8 3.8 27.0

Operating margin (%) 9.8 8.8 7.1 9.3 2.2

Pretax margin (%) 9.2 8.3 6.6 8.8 2.1
Net profit margin (%) 6.5 6.4 5.1 6.3 0.7
Effective tax rate (%) 20.4 14.9 19.8 29.6 9.9

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Jun (RMm) FY10 FY11f FY12f FY13f FYE Jun FY11f FY12f FY13f

Revenue 265.5 277.9 291.6 301.6 Volume (TEUs)

Growth (%) 15.7 4.7 4.9 3.5 Sea Freight 67,328 69,011 70,392
Rail Freight 3,460 2,249 1,462
Operating profit 23.2 27.2 28.0 28.8 Air Freight (kgs) 5,651 5,651 5,651
Operating margin (%) 8.8 9.8 9.6 9.6 Land Freight 1,339 1,673 1,841

Finance costs -1.5 -1.5 -1.2 -1.0

Associate 0.0 0.1 0.1 0.1
Pretax profit 21.8 25.8 26.9 27.9
Pretax margin 8.2 9.3 9.2 9.3

Tax expenses -4.7 -5.7 -5.9 -6.1

Minority interests -0.6 -1.4 -1.5 -1.5
Net profit 16.4 18.7 19.5 20.3
Net profit margin (%) 6.2 6.7 6.7 6.7
Source: Company data, RHBRI estimates

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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