Century ... Nov11

Mercury Security Research Report

Century’s 9M/FY11 results (9-month period ended 30th September 2011) were roughly within our earlier expectations.

“Results were within expectations”
For 3Q/FY11 ended 30th September 2011, group revenue of RM79.4 million was better by 11.0% y-o-y. Group 3Q/FY11 NPATMI (net profit after tax and minority interest) of RM9.0 million was also better by 11.0% y-o-y. The improved performance was mainly due to the increased business activities from Total Logistics Services particularly from new contract logistics customers.

During 9M/FY11, the group recorded revenue and NPATMI of RM220.5 million and RM24.1 million, respectively. This was better by 6.7% and 8.6% versus 9M/FY10. This was mainly due to the increased business activities from a few new contract logistics corporate customers (e.g. Celcom Axiata, F&N Diaries and Midea Scott & English).

OUTLOOK/CORP. UPDATESWe remain optimistic on Century’s overall group performance during its FY11 and FY12 in spite of the global economic situation. The group’s promising Procurement Logistics, Third Party Logistics (3PL) and Oil & Gas (O&G) Logistics business segments are expected to perform reasonably well.

“Concern - external environment”
According to the IMF’s September 2011 World Economic Outlook (WEO), projections indicate that global growth will moderate to about 4% through 2012, from over 5% in 2010. Real GDP in the advanced economies is projected to expand at an anaemic pace of about 1.5% in 2011 and 2% in 2012, helped by a gradual unwinding of the temporary forces that have held back activity during much of the second quarter of 2011.

However, IMF assumes that European policymakers contain the crisis in the euro area periphery, US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate. Moreover, the removal of monetary accommodation in advanced economies is now expected to pause. Under such a scenario, emerging capacity constraints and policy tightening, much of which has already happened, would lower growth rates in emerging and developing economies to a still very solid pace of about 6% in 2012.

“Domestic growth still holding”
Malaysia had reported a reasonable 2Q/2011 unemployment rate of 3.0% and CPI of 3.4% (September 2011). In early September 2011, Bank Negara Malaysia (BNM) had maintained its accommodative overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia’s GDP growth in 2Q/2011 amounted to 4.0%, amidst more uncertainty in the developed regions (US, Europe and Japan).

Century’s management continues to take the necessary measures to remain resilient, including focusing on providing value-added logistics solutions as well as maintaining cost efficiencies. The continued expansion of the group’s customer base for its supply chain solutions is encouraging. Century’s solid financial position and low gearing enables the group to maintain consistently strong results as well as embarking on strategic acquisitions to enhance its earnings growth.

The group plans to expand its supply chain solutions offering, and are also focusing on increasing its participation in the O&G logistics activities, including diversification upstream and downstream. In O&G logistics, Century currently provides floating storage and transportation services for international oil trading companies. Century also provides procurement logistics services to various multi-national electrical and electronics customers.
“Vessel acquisition”In October 211, Century’s 51%-owned subsidiary, Century Onsys S/B acquired MT Qaseh (a 7119 Dead Weight Tonnes oil products tanker) for a total cash consideration of USD4.75 million. The vessel was acquired from Pengkalan Megaria S/B, a 100% subsidiary of Export-Import Bank of Malaysia Bhd. This acquisition will enable Century to expand further downstream in its oil and gas logistics activities. Century is confident that together with the expertise of Onsys Energy S/B, the other shareholder in Century Onsys, the group would be able to expand further its logistics services to marine transport. The vessel will be reflagged to Malaysia and is expected to ply the oil transport market within Malaysian waters.
“Minimal impact from Thailand floods”
In recent months, there have been widespread floods in central Thailand. More recently, the large water mass has headed towards the Gulf of Thailand, causing the closure of various highways and industrial parks. In mid-October, the waters reached Ayuttaya, which is situated somewhat north of Bangkok. Century has a distribution centre in Rojana Industrial Park, Ayutthaya, Thailand held under Century Resources (Thailand) Ltd, a 90%-owned subsidiary of Century Logistics S/B, which in turn is a wholly-owned subsidiary of the group. Access to the Rojana Industrial Park was closed for a period of time, probably weeks.

Nevertheless, the impact resulting from the floods is expected to be minimal as Century’s facility consists of an elevated building. The local staffs had prepared precautionary measures including the protection of assets and had also deferred the deliveries of goods and assets from a new corporate customer. The facility’s “Property All Risk” insurance policy that is in place, includes flood coverage as well. As such, no financial losses are expected.
VALUATION/CONCLUSION
“Consistent dividend payout”
Earlier on, Century’s board of directors had declared a single tier interim dividend of 5 sen per share for its FY11. In September 2011, Century had paid out this interim dividend, totalling RM4.02 million. Given Century’s strong earnings performance, we expect Century to maintain its recent dividend payout track record of at least 20% of its annual net profits for its FY11 and FY12.

With an adjusted beta (correlation factor) of 0.38 to the KLCI, Century (-11.8%) has outperformed the KLCI (-3.1%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings, the major Tohoku natural disaster in Japan, debt-ceiling issue in the US and sovereign debt issue in Europe. As Century is not an especially large market-cap stock at the moment, this may put a dampener on its market visibility and trading volume.

“Maintain Buy Call”

Based on our forecast of Century’s FY12 EPS and an estimated P/E of 5.5 times (within its historical range), we set a FY12-end Target Price (TP) of RM2.46. This TP represents an attractive 49.2% upside from its current market price. Our TP for Century reflects a P/BV of just 0.9 times over its FY12F BV/share. The local Transportation Service sector’s average P/E and P/BV is 22.2 times and 1.4 times, respectively.
“Really attractive valuations”

We like Century due to its calculated growth strategy, undemanding P/E and P/BV valuations, and reasonably attractive dividend yield and ROE. With a strong management team, minimal gearing levels, tight cost-control and an efficient operational structure, Century is well poised to have a positive year ahead. The group is largely unaffected by the turmoil and weakness in the US and EU market due to its minimal exposure to those regions. Century is also currently exploring new business opportunities within Asia, particularly in China and Sri Lanka.

Nevertheless, there are possible routine risks to the logistics sector such as slowing global economic growth rates, natural disasters and armed conflicts. As such, we have been prudent and cautious with our forecasts. The sector may also be affected by foreign exchange fluctuations, coupled with volatility in the EU region and the weak GDP growth in the US that could dampen sentiment, demand and hence international trade levels.