Tiong Nam’s FY18 core earnings of RM44m (-25% YoY) were below our expectation and consensus coming in at 91.5% and 90.1% respectively. This was mainly due to a higher than expected tax rate. Management guided that there will be no plans on carrying out any new property development projects until a meaningful rebound in property demand is seen. We believe that the maximum yield threshold of 6.25% required by the company for the Warehouse REIT Listing is insufficient for investors. We maintain Hold with a lower SOP driven TP of RM1.02 (from RM1.34) to reflect (1) the revision in our earnings forecast; (2) discount of Warehouse REIT Listing occurring in the near term; and (3) slowdown in contribution from Property development.

Below expectations. 4QFY18 core earnings came in at RM9.9m, bringing FY18 core earnings to RM43.9. The results were below expectations, coming in at 91.5% of HLIB forecast and 90.1% of consensus. The weaker than expected results was mainly due to higher than expected tax rate. No dividend was declared.

YoY. Core earnings dropped 36.7% to RM9.9m from RM15.7 mainly due to higher finance cost (+70%), depreciation and amortisation (+16.2%) and tax expense (+29.5%) caused by non tax-deductible expenses.

QoQ. Core earnings dropped 16.3% from RM11.9m mainly due to higher finance cost (+43.1%) and tax expense (+40.1%) caused by non tax-deductible expenses.

YTD. Core earnings dropped 24.9% to RM43.9m from RM58.5m, dragged by loss from logistics segment on high initial start-up costs on expansions and a higher tax expense (+22.5%) on non tax-deductible expenses. The loss was partially offset by improved contribution from the property development segment.

No new property developments in sight. Management has no plans on carrying out any new property development projects until a meaningful rebound in property demand is seen. The multi-storey warehouse in Kampung Tiong Nam, Shah Alam, is the only ongoing project with completion targeted by FY19.

Warehouse REIT Listing unlikely in the near term. We believe that the maximum yield threshold of 6.25% acceptable by the company in order to REIT it’s warehouse assets is insufficient to attract current investors (6.9% based on M-REITs Average 5- Year Forward Yield). As such, we ascribe a 10% discount on the potential Warehouse REIT valuation in our SOP.

Forecast. We adjust our core earnings forecast to FY19: RM42.3m and FY20: RM38.5m which shows a negative growth from FY18 to reflect: (i) stiffer competition in the Logistics Segment keeping margins depressed; and (ii) declining contribution from Property Segment.

Maintain HOLD, lower TP: RM1.02 We maintain Hold with a lower SOP-driven TP: RM1.02 (from RM1.34) to reflect: (1) the competitive logistics environment keeping margins depressed; (2) discount of Warehouse REIT Listing occurring in the near term; and (3) slowdown in contribution from Property development.

Source: Hong Leong Investment Bank Research - 30 May 2018