9MFY19 normalised PATAMI below estimates. Tasco recorded 3QFY19 normalised PATAMI of RM2.7m (-68.0%yoy), bringing its 9MFY19 normalised PATAMI to RM10.4m (-57.7%yoy). This was below ours and consensus’ estimates by a variance of more than -10%. The deviation was mainly attributable to higher borrowing costs to finance for the cold supply chain (CSC) business and the land warehouse in Pulau Indah.

Subdued international segment PBT in 3QFY19. The marginal growth in PBT for the segment was mainly stem from the ocean freight forwarding business which recorded a loss before tax of -RM0.4m amidst: (i) the drop volume especially from a solar panel customer; and (ii) the preference of existing clients for direct sea shipment booking. Nonetheless, the discontinuation of a loss making business with an E&E customer in the air freight forwarding business coupled with spot shipment helped to pare the decline in PBT of the segment. Looking ahead, Tasco’s appointment as AirAsia’s first direct logistics partner early this year will provide support for the air freight segment in the long run.

Domestic segment buttressed by CSC business. The main driver for the segment in 3QFY19 was the cold supply chain (CSC) business which recorded a post-acquisition revenue and PBT of RM25.8m (+22.0%yoy) and RM3.4m (+27.0%yoy) respectively. This translates into a reasonable PBT margin of 13%, marking its fifth consecutive quarter of being above 10%. To recall, the CSC business handles approximately 80% of all the domestic ice cream market in Malaysia. Losses before tax for trucking services, meanwhile, narrowed down by -56.7%yoy due to continuous cost-saving measures.

• Tasco Bhd (TASCO) reported a net profit of RM3.2m in 3QFY19 which improved 14.9% qoq but tumbled 61.1% yoy. Meanwhile, revenue down 3.4% qoq and 3.6% yoy.

• Better QoQ performance was lifted by International Business Solutions (IBS).

• Meanwhile, unfavourable YoY performance was bogged down by Contract Logistics Division (CL) under Domestic Business Solutions (DBS)

• Below expectations. 9MFY19’s net profit below ours and consensus expectation by matching 55.8% and 53.7% of full year earnings estimates respectively. The lacklustre performance was mainly due to continuous losses in Ocean Freight Forwarding (OFF) division and uninspiring performance under CL Division.

OFF continued to bog down IBS performance despite favourable performance in Air Freight Forwarding (AFF). IBS’s revenue up 7.6% qoq but slid 9.6% yoy with PBT up 59.5% qoq and 1.6% yoy to RM2.5m. This was thanks to better performance in AFF. Cumulatively, IBS 9MFY19’s PBT tumbled 47.4% given lackluster OFF performance (registered a loss before tax of RM1.4m as compared to PBT of RM7.5m in 9MFY18) which outweighed better performance in AFF (+107.5% yoy to RM7.1m). OFF performance was mainly affected by direct sea shipment booking with carrier by existing solar panel customer.

CL division remained soft mainly due to: 1.) Lower sales in warehouse business coupled with high operating costs incurred for newly secured convenience retail business. 2.) Higher fleet maintenance expenses for Haulage business. As such, CL’s PBT was down 2.5% qoq and 61.5% yoy. Meanwhile, 9MFY19’s PBT decreased 51.7% yoy to RM12.2m despite a revenue growth of 11.3% tot to RM240.3m.

Cold Supply Chain (CSC) division recorded decent performance for 3QFY19 and 9MFY19. PBT increased 27.7% qoq and 26.6% to RM3.4m with 9MFY19’s PBT surged 127.1% to RM9.1m.

Overall, DBS registered flat QoQ performance and unfavourable YoY results. DBS’s PBT inched up 0.6% qoq but tumbled 43.6% yoy. Cumulatively, 9MFY19’s PBT was down 20.5% to RM21.4 in view of weakening performance in CL that mitigated by better showing from CSC division and Trucking division (recovered from losses of RM2.2m to a profit of RM0.1m for 9MFY19)

Risk of slowing down for domestic and global economy. In the latest World Economic Outlook report released in January 2019, the International Monetary Fund downgraded its global growth projection for 2019 to 3.5%, 0.2 pts lower than its projections in October 2018. Meanwhile, for Malaysia, the government in its Economic Outlook 2019 report has revised downwards its 2019 economic growth forecast to 4.5%

We slash our earnings forecasts for FY19 and FY20 by 28% and 8.5 % respectively to account for potential slowdown in domestic and global GDP growths.

Downside risks are: 1.) Rising operational costs (in particular labour costs and impact from new Sales and Service Tax) 2.) Higher interest costs 3.) Stiff competition for cargo in our traditional core businesses. 4.) Hiccup in performance due to loss of major customers, and 5.) Slowdown in global economy.

Downgrade to HOLD from BUY call for Tasco with a lower target price of RM1.28 (previously was RM1.35) following our earnings cut. Our valuation is pegged at 9.9x FY20F EPS. The PER ascribed is -0.75 SD of the group historical 5-year mean PER in view of low liquidity of the stock and potential softening global economic growth.

Nevertheless, we favour for its long-term future growth following its venture into cold chain market. With this, TASCO is able to generate synergies across all of its divisions and provide integrated logistics services for its clients. Furthermore, the trading business (by YLTC Sdn Bhd, a 60:40 JV between Yee Lee Corporation Bhd and Tasco Bhd) will create further synergy to its existing businesses such as Cold Chain and Contract Logistics.