THE nondescript corporate office of Tasco Bhd, located in a corner of a large piece of land in Shah Alam that also serves as a warehouse centre, is in sync with the low-profile nature of the company.
“We have always been quiet,” quips managing director (MD) Freddie Lim Jew Kiat when the subject of the company being under the radar of investors crops up.
Japanese influence is obvious at the logistics provider majority-owned by Yusen Logistics of Japan.
Upon entering the lobby, the first thing that strikes a visitor is a Japanese-styled garden on a small plot of land outside the high glass-panelled walls.
As we settled down for a discussion in one of the meeting rooms on the ground floor, we were prompted to sit near the door.
“If there is an emergency, you get to escape first,” Lim says in jest to break the ice.
We learnt that it is apparently typical of a host in Japan to invite guests to sit closer to an exit in case of an earthquake, where they can escape before the host.
The company’s founder and chairman Lee Check Poh is also said to have “embraced” some aspects of the Japanese culture, having spent some time in that country and with Yusen as a partner since the 1980s.
Out of the limelight, however, a plan dubbed “Project Snow” is being rolled out to take the group to its next growth trajectory via expansion into the cold chain logistics segment. Last month, Tasco announced two major acquisitions totalling about RM300mil, paving its way to the niche cold chain logistics.
“Our target is to hit a revenue of RM1bil in the mid-term,” Lim says on a more serious note.
A high target it would appear, considering that it is doing a revenue of RM515mil currently.
However, Lim reckons it is achievable and does not rule out more acquisitions.
“We are always on the lookout for opportunities ... it’s a matter of getting the right asset and pricing.”
Tasco deputy MD K.Y. Tan says that the company has the appetite to gear up.
“We will fund the acquisitions through bank borrowings and internal funds.
“Our gearing is now at 0.15 times and the recent acquisitions will bring it to about 1.3 times.”
It has RM90mil in cash and balances, with total borrowings of RM46mil as at financial year ended March 31, 2016 (FY16).
“It is manageable and we have the full backing of our parent company Yusen.”
Going forward, Tan says it is looking to reduce its gearing to less than one times.
Yusen, which controls 65% of Tasco shares, is part of the NYK group – one of Japan’s largest shipping and logistics company.
Lee, meanwhile, owns a 9.83% stake.
Rationale for the cold chain venture
Lim explains that the move into the cold chain segment has been on the cards for a while.
Currently, Tasco provides freight forwarding services for air, sea and land as well as contract logistics like warehousing services.
“We have been looking at venturing into cold chain logistics from five years ago,” he says, adding that with this segment, it will have complete end-to-end solutions for its customers.
A cold chain is temperature-controlled storage facility for perishable goods and pharmaceutical products, among others, from the point of their origin at the manufacturer through to their transportation, unloading, distribution, and cold storage at the site where they will be used.
The group, Lim says, has been looking at expanding cold chain facilities in strategic locations, but decided that it is more worthwhile to make acquisitions.
As example, he points out that the cost of scaling up its current corporate head office and Shah Alam logistics centre into two-storey buildings are about the same as its acquisitions.
“What we’re buying is reasonable. The PE (price-to-earnings) multiple is ok,” Lim says.
On average, companies with cold chain logistics and warehousing businesses are trading at about 28.4 times. Japan’s Nichirei Corp is trading at a PE multiple of 25.1 times, India’s Snowman Logistics is trading at a PE of 41.9 times, while Thailand’s JWD Infologistics PCL is trading at 24.2 times.
Tasco is currently trading at a PE of 10.78 times.
In addition, Lim discloses that the margins in cold chain logistics are also higher, given the investments and limited players in this sector.
The cost of a cold chain warehouse is about RM450mil, triple that of a normal warehouse of RM150 per sq ft.
“The margins can be more than 10% or slightly better. There’s also a strong demand for cold chain logistics providers with one-stop logistics solutions, quality services, innovative solutions and advanced facilities,” he says.
He notes that there is no strong presence of global logistics players with international best logistics practices for food safety and quality.
A recent report by the US Trade report estimated that the cold chain industry in Malaysia is worth some RM60bil.
In 2015, 47% of modern retails in Malaysia outsourced their cold chain and are expected to keep expanding and outsourcing this service.
Lim notes that one of the most difficult parts of cold chain logistics is the pharmaceutical portion followed by baby foods, food and beverages, and healthcare.
Tasco is not entirely a newcomer in the cold chain sector, as it has been doing cold chain logistics in the past two to three years, albeit outsourcing it to other players.
Going forward, Tasco expects cold chain to make up about 20% of its revenue. Currently, Gold Cold Transport Sdn Bhd (GCT) is making a pre-tax profit of about RM13mil, while MILS Cold Chain Logistics Sdn Bhd has achieved break-even.
For FY16, Tasco derived 43%, or RM223.7mil, of its revenue from the contract logistics division. Its air freight forwarding division contributed 28% or RM145.7mil to revenue, while the trucking division contributed RM82.5mil, or 16%.
Tasco sees Tiong Nam Logistics Holdings Bhd as its closest competitor. Tiong Nam commanded about a 10% overall market share in cold chain contract logistics in 2016.
With its acquisitions, Lim reckons Tasco will command about 10% of the market share – about 8% coming from its acquisition of GCT, with 1%-2% from the second purchase of MILS.
Tasco plans to acquire GCT for RM186.08mil.
GCT, which is one of the largest cold chain logistics players in the country in terms of storage capacity size, is principally involved in the business of transportation, cold room storage facilities, repackaging and value-added facilities.
The GCT group currently operates from its warehousing facility in Shah Alam with a total storage capacity of about 25,600 pallets and has developed into a full-fledged chilled and frozen food transporter.
Lim explains that the acquisition of GCT will provide the group with multiple temperature-controlled logistics facilities ranging from 18 degrees to minus 30 degrees, which only a handful of players can provide, giving the group certain advantages.
Subsequently, it announced that it intends to purchase land in Pulau Indah, Selangor, and a stake in MILS for nearly RM143mil.
Tasco is buying six parcels of land measuring 39.52 acres in Pulau Indah and also the buildings from Swift Integrated Logistics Sdn Bhd for a cash consideration of RM113.83mil.
The share purchase will provide Tasco with access to a temperature-controlled storage facility with a capacity of 10,500 pallet space.
Combining the existing capacity of MILS and GCT, Tasco will eventually have a combined cold room storage capacity of 36,100 pallet space, says Lim.
With the purchase of the Pulau Indah land, Lim says the company has a lot of space for future expansion.
Meanwhile, Lim says the company has no intentions of venturing into the already-crowded and competitive last-mile delivery services.
As e-commerce, or Internet shopping, gains popularity, courier firms are seen as the providers of last-mile services between the retailer and purchaser.
Commenting on the fluctuations of the currency, Tan says the lower ringgit augurs well for Tasco as exports volume grow.
“We have some US-dollar loans and we hedge and swap it with the ringgit,” Tan says, adding that most of its business is done in ringgit terms.
While the fuel cost constituted 30% of its transport cost, Lim says the company has been managing its cost well and passes on some of the cost to its customers. He says the group is very conscious of its cost and has in place strategies to bring down costs such as using the right technology.
Stock piquing interest
Shares of Tasco under-performed last year because of a stagnant earnings outlook. Its shares fell more than 8% in 2016. Year-to-date, it has gained more than 13% to RM1.70, giving the company a market capitalisation of RM340mil.
Based on Wednesday’s share price of RM1.70 and FY16’s dividend per share of 15.30 sen, Tasco has a yield of 8%.
For FY16, the company posted a net profit of RM30.6mil on a revenue of RM515.6mil. Tasco derived 43%, or RM223.7mil, of its revenue from the contract logistics division. Its air freight forwarding division contributed 28% or RM145.7mil to revenue, while the trucking division contributed RM82.5mil, or 16%.
In the first six months to Sept 30, Tasco saw its net profit rising to RM14.13mil compared with RM13.18mil previously. Its revenue for the period rose to RM277.8mil against RM246.72mil. The proposed acquisition is expected to start contributing to Tasco in FY18. Tasco is expected to call for an EGM in April for the two acquisitions. The company hopes to complete the acquisitions in April.
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