SCS – An opportunity in turbulent times – Initiation

• Saigon Cargo Services Corp (SCS), a leading air cargo terminal is capitalising on Tan Son Nhat International Airport (TIA), Vietnam’s fastest-growing air cargo hub.
• SCS now trades at 11.9x FY21F P/E which is relatively attractive while capacity expansion is near-term catalyst.
• We initiate coverage on SCS with an Add rating and target price of VND144,500.

Vietnam’s air freight market to stay buoyant

We expect Vietnam’s total air cargo volume throughput to rise 10.5% p.a. in FY21F-30F, driven by sustainable import-export growth and the combined benefits of FTAs and the relocation of supply chains from China to Vietnam. TIA in Ho Chi Minh City is the fastest-growing hub in the country; its Terminal 3 expansion project should lend a further boost.

Equipped to be the country’s leading air cargo services provider

We believe SCS’s air cargo volume market share in TIA should grow to 55% over FY21-30F period, transforming it into Vietnam’s leading air cargo services provider, premised on its state-of-the-art terminal and it being the only provider capable of expanding capacity at TIA. We expect SCS’s performance to remain robust given its efficient cost control, strong balance sheet with zero debt and a preferential 10% tax rate until FY23F.

SCS’s net profit to dip 5.8% yoy in FY20F due to the pandemic

SCS’s business would start to recover in Dec 2020F, when we believe a vaccine could become available according to World Health Organization (WHO) and the pandemic could be brought under control. We expect revenue/NP to dip 6.3%/5.8% yoy in FY20F.

Capacity expansion to spearhead growth story beyond FY20F

While its sole rival Tan Son Nhat Cargo Services JSC (TCS, Unlisted) faces a capacity shortage, we believe SCS will be able to capitalise on TIA’s growth with 75% expansion of SCS’s current capacity by 2023F. We expect SCS’s international cargo volume to rise by an average of 10.6% p.a. in FY21-24F. We forecast 14.6% revenue CAGR and 11% net profit CAGR in FY21-24F.

Initiate coverage with Add and target price of VND144,500

SCS now trades at 11.9x FY21F P/E, far below its historical three-year average P/E of 14.1x. Our FY21-22F NP forecast is 14%/11% higher than consensus due to our higher expectations in the recovery of SCS’s international cargo volumes based on its technology competitive edge and its competitor’s capacity shortage in TIA.

Downside risks and re-rating catalysts

Downside risks include lower-than-expected cargo volume and price due to prolonged global pandemic which can dampen global trade. Re-rating catalysts include higher-than-expected cargo volume, announcements of capacity expansion and the M&A plan..

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