Highlights/ Comments

• More light has been shed on the reason behind weaker core net profit reported in 3Q17 primarily due to higher depreciation cost as a result of accelerated depreciation of asset value of a warehouse which has not obtained lease extension. Moving forward, quarterly depreciation would normalize to circa RM6m/quarter.

• The group has also continued its commitment in investing in warehouses with 273, 600 sq. ft. total capacity added in Malacca and Tanjung Langsat in 9MFY17. Currently, overall utilization of warehouses stands at 93% with new addition of warehouse in Tanjung Langsat yielding low utilization (as it has just commenced operations in early 2017).

• Tiong Nam is also expanding its regional logistics network presence by establishing its trucking network linking Malaysia-Thailand-Myanmar-Laos-Vietnam-China. Management guided that a trip from China to Malaysia requires 5 days (half of 10 days required by sea freight). From cost perspective, land freight is between air freight (costliest option) and sea freight (cheapest option).

• We opine that there would be demand for land freight, as it is 3x cheaper than air freight and is relatively time efficient. The cross-border linkage initiative would commence in mid April 2017 and we believe that there would be a one-year gestation period before significant revenue contribution materializes.

• Aside from its current B2B-only courier business model, the company is moving into B2C e-commerce last mile delivery business under the brand name of ‘Instant’. The group is currently in talks with online market place players like Zalora & 11Street, which would contribute up to 4000-6000 packages/day at full swing.

• Property segment would still be anchored by its Pinetree Residence project in FY18. To date, RM77.4m has been recognized, implying RM384.5m worth of revenue left to be recognized for the project. Therefore, revenue could be lumpy and higher for property segment for FY18 if take-up rate picks up in that period.

• On the flip side, REIT listing of its warehouses has been deferred until up to March 2018 as the group is still finalizing on the valuation of its warehousing assets.

Risks

• Overexpansion of warehousing space;

• Cancellation of REIT listing.

Forecasts

• Unchanged.

Rating

BUY ↔

• Despite the delay in REIT listing, Tiong Name’s logistics division remains resilient with long term growth prospects through its latest venture into B2C last mile e-commerce business.

Valuation

• Reiterate our BUY call on the stock. SoP-driven TP raised to RM2.15 as we incorporate latest market value of its undeveloped landbank in our RNAV valuation for property segment.

Source: Hong Leong Investment Bank Research - 8 Mar 2017