TRADE is the THEME

During a period when we have terms such as "Trade WAR", "Trade Friction", "Trade Skirmish", "Trade Scuttle" - it just means that we are living in a world where we cannot do without TRADE. With trade, it also means more people, goods, food are transported. With trade means more roads, bigger ports, more flights, more containers, oil are traded. Think about it. In the context of business, transportation and trade, in several aspects there are big winners - Alibaba, Amazon, Airasia, Maersk, Hutchison, Keppel Port, Grab - but trade also create ecosystems where the middle size players, small players are able to survive and some consequently thrive.

Over the past few decades, there have been massive growth in movement of goods, people between the Pacific, Europe to Asia to American continent. And that growth will not stop. Will a friction between China and US on trade ever reduce that? It will slow it down a little - but over the long run, this will not reduce - unless there is a real war!

Some of things that the US government is pushing for example, i.e. more electronics being manufactured in US will not happen in a big way. Today, China, perhaps is contributing 80% to 90% of the world's electronics manufacturing.  That percentage will not grow anymore as China has over the last few years been rethinking its economy model from largely producing to more consumption based - but it will take time but eventually they will succeed. While the percentage will not grow, the total will continue to grow - for the next decade at least.

So what does it means? Some other countries such as Vietnam, Malaysia, Indonesia, even India will slowly take over the small role of producing for the world. (With that, Malaysia for example will even experience bigger trade volume.) Unfortunately, Malaysia has stagnated to some extent, and we are still being considered as an alternative place for large medium and large manufacturers. With that though, Malaysia will ever need bigger ports, more and bigger roads, IT systems, logistics companies.

Today, it is inconceivable that US will be growing its manufacturing base in a big way, as its economic base has passed that. It will not be manufacturing textiles, furniture, phones, shoes in a large way but what will happen is that high end products such as planes, machines, may still be from there.

Many commentaries I find have also said that the so-called Trade War seems more like a "Technology War". It is not surprising considering the attention given to one of China's more respected company, Huawei - as the world is moving towards usage of technology and electronics.

Looking back into Malaysia. What will the Trade War bring to us? Malaysia still has a strong manufacturing base. We do have talent, infrastructure for that - although it is never enough - no country has enough. Both US, China and some of the large companies that are in between i.e. from Germany, UK, Japan - will always look for alternatives. It has been proven that Vietnam has been the main beneficiary. Malaysia, is another alternative. Hence, while the world will trade a little less, Malaysia may not be that affected when comes to physical goods trade as goods may be manufactured and traded off from here. The hike in oil price will be curtailed as demand may soften. But our logistics companies, transportation related companies, toll roads especially such as PLUS will not be that affected. In fact, these sectors' fundamentals will improve.

I have hoped that our government sees through this. We need more technology companies, talents. MESTECC has to look at how to encourage more creation of tech companies rather than focusing on plastics (i.e. what harms it brings), solar, LYNAS. MITI has to look at making Malaysian companies ready for this change. Which is, more Malaysian companies taking opportunities rather than solely dependent on foreign investments. From this part, I still do not see the light.

However, with the last 7 months uncertainties - I think there will still be uncertainties riding through 2019 - coming from Malaysia and the world. Like someone whom I know said, she is still uncertain over what will happen to toll businesses as it seems the government is allocating RM1 billion to pay the concessionaires next year while in the past they claimed that it could have easily been solved through buying out of these concessions. (If you read my previous articles, one will understand that it is not that easy - as these businesses, financing have already been intertwined - if one is taken away, the other will collapse - just like playing Jenga and in a situation where there are only very few pieces to hold one another. Many whom are hoping for toll elimination or even simple reduction just do not see the complexities although it has been made into simplified context during the election period.)

The massive drop in the market has also created opportunities - one has to continue to look for well-run, good companies and hopefully those that are less dependent on government and their "flippings and floppings". (In a way, I can understand as they are still in learning mode - many newbies, although it is hopeful that the learning can be much faster.)

I have hence decided to buy 7000 units of Freight Management. Why? Because it is a company that has dropped in its price but not value, lesser affected by some drastic change in where the world has moved into in terms of e-commerce and trade and less affected by government's action.

For Freight, if we understand what caused its stagnation in the past 3 years and looking at its growth trend for the longer term i.e. revenue (micro), macro economy situation, I think it is cheap as it is currently at 5.5x PE and having about 6% dividend yield.

With that Happy New Year to all readers!

Revisiting Freight Management as an investment

Traditionally, Malaysia has always been a strong hub for trade. With trade, comes the services needed towards trade, i.e. logistics, which involved the services required of it including, haulage, trucking, clearance etc. Now, I believe will involve another wave of logistic enhancements in Malaysia especially with the expansion of e-commerce.

If one can remember in 2012/2013, DRB-Hicom made a huge purchase of Proton. The Proton deal does not do good for the group as it created huge losses over the last few years. However, if one can remember, at almost the same time, it also acquired a controlling stake (then was around 30+%) in POS Malaysia.

Over time, it has managed to hold a more than 50% of POS Malaysia through several exercises - among them acquisition of Konsortium Logistik Berhad, restructuring through injection of KLAS and several other smaller companies.

Why is it doing this? It sees opportunities.

Along this period as well, there have been so many strategic partnerships or business investments involving the logistic companies. I only need to point a few here (besides the DRB's move) and one will be able to see it - Yamato's entry into GDEX, Tasco's acquisition of Gold Cold chain, Korea's CJ acquisition into Century Logistic and several more. Why out of a sudden?

The government over the last few years have been talking about expansion in this area of business. Logistics involve plenty - from ports, highways, airports, business infrastructure, people talent and the business enablement. Imagine, we are continuously talking about building new ports or at the very least expanding the existing ones.

I strongly believe that the continuous investment into this area of business will successfully enhance Malaysia as a strong logistic hub. I believe that in several areas, such as banking, plantations, upstream oil and gas and even construction - we can only do so much in Malaysia. But in logistics, because of our geographical location - we can have more than our country's capacity can provide. It definitely involves services strength and Freight Management is largely about that.

What about Freight Management that interests me

Not a household name, but in any case there are rarely household names in freight businesses.
As a listed company, it is one of the least noticeable. (The lesser the people notices, the better.) It is in a growing space and it has great management which I will explain below. Also, importantly, it is not expensive (RM245 million market cap, PE around 10x-12x) and yet to really move much in terms of stock price as compared to many other companies recently. Dividend is also consistent and yield is good.

Not everything requires the ownership of the entire foodchain - integrated offerings no doubt - but one does not need to own all. Freight Management is about that. I had an article which I would like to bring back. In fact, there has not been much changes of its business since that article. Additionally, one can understand the business more here and here. In terms of business, I like it for its asset light-er strategy as compared to many other competitors.

When a company has a strategy of less asset, it has to have a strong services and integration arm.

The statement by the CEO sums it:

(The company specialises in transporting less than a container load (LCL) for customers which Chew says is a niche business. “We are probably the only listed company that sees freight being our core business. Some other similar companies may be strong in third-party logistics, warehousing or even the last mile delivery,”)

Diagram 1: Last 5 years numbers

For the last two years, its revenue has stagnated a bit but this has picked up for its FY2017 as highlight below. The main thing is that though, its revenue growth is pretty consistent (as well as Profits) over the last 10 years which signifies the strength of the management. The CEO has mentioned of 15% growth target annually.

During 2015 and 2016, there was a period where business volume has gotten tougher partly due to challenges in reduced consumption due to GST and the challenging international trade scenario, as probably volume in/out China has been affected. This is also, as mentioned in the article, where the company invested into a new warehouse for pharmaceuticals and healthcare. Hence, its depreciation has increased.

Freight's strength is in seafreight business (quite common) while 3PL & warehousing and airfreight comes in a distant second and third.

In terms of the type of services and container mode, its import and export is quite balance - potentially signifies that, Freight mainly does operations for its export clients which will be importing and value add and later exports those products AND/OR, its customer type is just well-balanced.

On e-commerce, it has embarked on that space by having a 65% stake in FM Hubwire Sdn Bhd. This is still preliminary and it is not profitable. It just to show that it is looking at this space as an opportunity.

Dividends

As provided in Diagram 1 above, its dividend numbers have been pretty consistent - upped from 4% in FY2012 to 5% in FY2016. This is despite its profit coming down for 2015 and 2016. Normally, for a company to be able to do that - it has 2 things in mind - the reduced profitability is only short term in nature (hence it has comfort to provide a consistent dividend) and cashflow is strong enough for it to do that. At 5% dividend, that translates to about 3.78% dividend yield. (I know that at this moment, it is not that important when stocks are appreciating, but when the tides run low - you know what the rest of the sentence will say).

I have decided to purchase 7000 units at RM1.32.

Note: Not all freight and logistic companies do well, but Freight Management seems to be the one that does well.

Freight-WA may be interesting if its risk you are seeking

I have looked at Freight Management's results for the 1Q 2013. It seems that the company is on track despite the reducing gross profit margin. You can see that the company is still trying to grow with controlled investment into some of the areas. I have liked the company for its asset light business as compared to some of the other logistics companies.

However, another play which can be possible is the Freight-WA. Its exercise price is RM0.97 and expiry is sometime around 2017. Current parent price is around RM1.35. With the warrant around RM0.39, it is close to in the money with about 4 years of holding.

Warrant would be good if you have a good feel of the company moving forward. If the company trends the other way however, you can potentially lose all your money. Its higher risk, for those who like that.

One should not be afraid of Freight Management

This is one company which slips right through before my eyes. Why? I have never had the positive mindset for logistics services business. In my mind, I have always thought that this business is in a very competitive landscape. I have seen some entrepreneurs with the call cards registered in their phones, after a number of years of experience, came and venture out themselves - they are able to survive with very few people working for them. With the contacts and some licenses, they can basically operate.

On the other part of the landscape, companies like Freight Management are up against the very large freight forwarders in this world like Kuehne and Nagel, Expeditors, CEVA etc. This is a borderless business. While there are licences involved in their ability to operate, it was most of the time never a problem. Hence, you are seeing in Malaysia as well as in countries that Freight Management operates in the very large and smaller players are there as well.

However, despite all the fear how can we fault the consistent growth that Freight Management has been able to register over the last 10 years as below.

5 years Financial Highlight 2003 to 2007

5 years Financial Highlight 2008 to 2012

If you look at the track record, the revenue and Net profit were registering growth every year without fail. That is almost impossible to achieve but yet is happening. How can this happen? I guess as in most people whom are not very aware of the company, this is partly the reason. You can almost missed the company if you are looking for trading volume. However, the unfettered focus by the management to grow the business and profitability, after that let everything else runs its own course - this in every investments is almost more important - no doubt. The thing that probably will differentiate my earlier failed investment of very good companies is that Freight Management does pay consistent dividend and it is mainly a services company. Hence, cashflow is more consistent - and from there it will continue to be able to pay good consistent dividends.

On the industry outlook, this region's shipping volume grows and Malaysia continues to be a very important regional and global logistics hub. It seems that despite the continuous tough competition, Freight Management is not losing market share - it in fact seems like gaining market share.

Having looked further, I like Freight Management for many other reasons. Compared to Tasco and Century Logistics, this company is slightly lighter in terms of Fixed Assets (things like trailers, prime movers, warehouses etc). This shows that as in its namesake, its primary focus is freight forwarding (around 70%). The others like warehousing, haulage, tug and barge etc. are more complementary to the group than being the main contributor.

To be able to do that well - it is not easy but it shows where the company's strength is. Consistent volume from its main customers, strong customer service and deliveries. That is hard to achieve, but if you do them well, hardly a reason for its customers to leave the company. Hence, I can see the strength of this company is strong services as well as account management.

Freight Management is trading at around RM190 million market capitalisation, hence based on last year's financial performance, its current price is below 10x PE. And if it is able to grow at such consistencies and pace, why should anyone be worried of what it is trading against its peers and industry? My question is, are you able to find another business at less than 10x PE with a strong assurance from strong previous track record? Maybe some, but not too often.

Judging from what I can project into the future, there is no reason why Freight Management cannot continue to be strong. It has gone through tougher times of the 2008 and came out strong, hence this is a good candidate for one's portfolio.

Another thing I note having flipped through the company's many years of Annual Reports - see below. The directors are paying themselves only the basics. Others come from dividends from their shareholdings as well as capital appreciation. That is something which we should applaud and respect. Again, it is hardly seen.