Integrated Logistics Bhd
(Oct 19, 94 sen)
Maintain outperform at 93 sen with fair value RM1.47: Hong Leong Asia revealed during a recent investors’ conference that its refrigeration and cooling products division under Frestech/Xinfei, based in Henan, China, has formed a “partnership with Integrated Logistics China to build and operate a central distribution centre”.

We consider Frestech/Xinfei a high-growth blue-chip client on which ILB can piggyback to expand its presence and scale of operations in China. Frestech/Xinfei is the second largest refrigerator and freezer maker in China. Analysts project the market for refrigerators and freezers in China to grow by a compound annual growth rate of 9.9% between 2009 and 2013.

We understand that backed by a five+five-year long-term lease agreement with Frestech/Xinfei, ILB’s US$25 million (RM77.5 million) investment in the warehouse will have a pay-back period of eight to10 years. Based on our estimate, the first full-year contribution from the warehouse in FY12 ending December will boost ILB’s FY12 net profit by 20%.

We are cutting our FY10 net profit forecast by 42% largely to reflect: (i) a three-month delay in the completion of the disposal of its Malaysian assets; and (ii) higher tax. FY12 net profit forecast is raised by 20% largely to reflect the first full-year contribution from the new Frestech/Xinfei warehouse.

Risks include: (i) a double dip in the global economy, hence China’s export sector; (ii) prolonged downturn in Dubai; and (iii) rising costs in China, particularly, labour.

With the disposal of its business in Malaysia, ILB has very much become a high-growth China-based company listed in Malaysia. Indicative fair value is kept relatively unchanged at RM1.47 based on 13 times FY11 EPS, at a 30% premium to our benchmark one-year forward target PER for the transport and logistics sector of 10 times to reflect ILB’s superior earnings growth visibility with the good execution of its second wave of investment/expansion in China. — RHB Research Institute, Oct 19


This article appeared in The Edge Financial Daily, October 20, 2010.