24 FocusM | April 25-May 1, 2015 Mainstream Labour cost has always been high in the courier industry; staff turnover can also be relatively higher than in other industries GDex focuses on e-commerce Segment to be key driver of earnings growth although it has a distance to go before catching up with the contribution from express delivery by Ng Wai Mun Listed integrated courier company GD Express Carrier Bhd (GDex) is confident of facing the challenges of an economic slowdown, implementation of the goods and services tax (GST) and rising wages. The company will be tapping into the strong growth in the e-commerce sector, especially online shopping, in a big way to grow its business. Its managing director Teong Teck Lean says: “GDex has been in this competitive market for years and thus will be able to see through various obstacles this year, be it a slowdown in the economy, implementation of GST or higher labour cost.” The company has been chalking up growth in the teens over the past two years, and Teong is confident revenue will grow in the mid-teens again this year. GDex recorded a 17% increase in revenue in FY14. Some analysts agree that GDex’s revenue growth in the teens is sustainable. As to where growth will be coming from, Teong says GDex sees the growing significance of the e-commerce sector to the courier business, particularly online shopping. The latter potentially will be one of the growth areas for GDex, he says. He adds that the company will ride on the euphoria of the e-commerce business to complement and sustain the strong growth of its existing courier-related services. In fact, Teong has been holding to this belief of e-commerce’s growing presence for some time now. Noting the competitiveness of the courier industry with almost 100 operators in Malaysia, he hints that a rate hike would be quite difficult if a player is adamant about clinging on to its existing market share. His view is shared by many analysts. RHB Research says: “GDex has seen increasing contribution from its e-commerce clients, where it provides business-to-customer (B2C) deliveries.” The research house believes this will be the key driver for earnings. According to RHB Research, GDex’s client, Astro TV’s shopping channel Go Shop, is seeing strong volume despite being launched only last November. RHB Research, however, cautions that GDex’s exposure to the growing online retail industry is still in the early stages. “Only 10% of the total volume handled is from B2C customers like Lazada and Zalora.” In its March report on the carrier operator, RHB says it expects GDex’s outlook to be “rosy ahead, with very minimal capex outlay relative to its strong operating cash flow churn”. The research house nonetheless feels that dividend may be minimal as GDex could be embarking on an exponential growth trajectory. It sees the courier industry maturing eventually without needing any major capex. On that note, RHB says GDex’s dividend payout ratio could potentially increase from the current 35%. In FY14, GDex paid out a dividend of one sen a share. Strong ties with clients An analyst says the e-commerce sector’s growth itself may be slightly stifled this year given the expected slowdown in the higher-end retailing and electronics segment which target mid-higher end consumers. Whilst bullish on GDex, the analyst says e-commerce is something for the company’s future. He doesn’t see major growth in this segment’s contribution to GDex over the next two years, adding that consumers’ lack of trust of online transactions is another factor which may suppress e-commerce’s growth here. He says GDex’s express delivery division posts a revenue exceeding RM150 mil per annum. It will be sometime before any other fast-growing segment makes as significant an impact on contributions. The analyst adds: “GDex’s strength is its relationship with its established clients in this very competitive sector.” He estimates the revenue of the local GD Express Carrier Bhd Key board members and management Teong Teck Lean (managing director and group CEO), Lim Chee Seong (CFO) Major shareholders GD Express Holdings (M) Sdn Bhd 31.1% Singapore Post Ltd 25.8% Market cap (April 22) RM2.05b Share price (April 22) RM1.69 52-week high (April 9, 2015) RM1.82 52-week low (Oct 16, 2014) RM1.26 Financial results (H1 ended Dec 31, 2014) Revenue RM93.8m Net profit RM12.2m courier industry to be RM3.3 bil last year. This gives GDex a 5% share of the local courier market. “Commendable, given the sector comprises so many providers,” says the analyst. On GDex’s overseas expansion plan, Teong says the company is on the lookout for opportunities to gain some foothold in the countries targeted. He adds that any overseas venture would most probably be in a merger or acquisition as it would be very difficult to start from scratch in a foreign country. On competition, some analysts consider Pos Malaysia as one of GDex’s close competitors. Teong was impartial. He explains that Pos Malaysia has co-existed with the courier companies for years. “Each of us has our own niche market,” he explains. On the concerns of higher operating expenses, such as fuel cost, that could dampen GDex’s bottom line, Teong says: “These are all part and parcel of running a business in a (very) competitive sector.” Whilst it may erode profits, Teong says a portion of the increase in fuel cost has been passed on to customers in the Teong sees e-commerce, in particular online shopping, as one of the growth areas for GDex form of a fuel surcharge. “This has been an industry practice for years.” Teong says the company has always implemented measures to improve efficiency and reduce operating costs. “Like most other companies, GDex is also looking into e-billing to reduce the cost of sending monthly statements to clients.” Teong says one concern of the courier delivery sector is labour. “Labour cost is always high in this labour-intensive industry. The staff turnover can also be relatively higher than in other industries.” GDex is already paying wages above the minimum level, he says, adding that the company’s reliance on foreign labour is relatively lower as some jobs such as the drivers, are taken up by locals. Human Resources Minister Datuk Seri Richard Riot Jaem recently declared that a review of the minimum wage has been completed and submitted for the Cabinet’s approval. The current minimum wage is RM900 for the peninsula and RM800 for Sabah, Sarawak and Labuan. In the event of a substantial increase in the minimum wage, Teong says the company will probably pass on some of the extra cost to customers. Talk has it that the new minimum wage will be RM1,000. A market observer believes the new minimum wage will not affect GDex as its average wage is already above the RM1,000 mark. Seeking a tax allowance Even so, the observer claims the operating profit margin will decline by only four percentage points next year from FY14’s operating margin of 21% if GDex’s wage cost rises by 10%. This is assuming the company absorbs the entire hike in wage cost. Moving forward, Teong hopes the government can provide a special tax exemption to courier companies to further develop the sector. He says SMEs have been using courier companies to distribute their products. The tax allowance would act as an enabler, providing courier companies with higher profits, which would be reinvested for future growth. While growing in tandem with SMEs, courier companies will also help boost the small and medium enterprise sector. As it is, stiff competition has forced out several smaller companies. From a high of 117 back in 2002, the total number of courier companies had dwindled to 91 as of end-2014. Analysts expect the number of courier companies operating in Malaysia to continue to drop over the next few years. “The authorities should be more proactive in ensuring the number doesn’t drop further. Whilst it may be a fully mature sector, the authorities should continue to develop the industry,” says one observer. RHB Research is maintaining its buy recommendation for GDex with a target price of RM2.05. The counter closed at RM1.69 on April 22.
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