Management guided they will hold back its warehouse capacity plan to 7m sqft (from the existing 5.4m sqft). Instead, focus will be placed on attaining a larger customer base in order to optimise its existing warehouse capacity. Further capacity expansion will be carried out if utilisation hits the 85% threshold rate. Expansion into Laos is targeted to complete by October 2018 but we note that the overall regional presence (ex-Malaysia) is currently loss making and we believe it to only contribute positively in the longer term (est. 5 years). We maintain our HOLD call with a higher TP of RM1.04 (from RM1.02) to reflect higher warehouse utilisation rates while placing a 20% discount to the REIT listing to reflect the unlikely occurrence in the near term.

Warehouse capacity expansion. Management guided they will hold back its warehouse capacity plan to 7m sqft (from the existing 5.4m sqft). Instead, the company will focus on attaining a larger customer base to optimise its existing warehouse capacity. As of now, only 432k sqft capacity expansion will be carried out by FY20 (Laos: 32k, Kulim: 100k and Seelong: 300k). Further capacity expansion will only be considered if utilisation hits the 85% threshold rate. The warehouses are currently operating at 72%, improved from 66% (end FY03/18) due to increase in customer base e.g. Nestle and Tesco.

Purchase of land in Mukim for landbank. To recap, the company entered into a Sale and Purchase Agreement to purchase a land measuring 100 acres in Mukim, Johor on 5 June 2018. Management clarified that the land will be kept as landbank for future property development projects. The land is located next to the upcoming property development project in Kota Masai which is targeted to be launched by end FY19. With regards to the overall landbank owned by the company (Warehousing: 69.3 acres and Property development: 160.3 acres), management has no plans on selling the landbank unless a good offer arises.

Expansion into Laos, Vietnam in its final stage. The expansion into Laos is targeted to complete by October 2018 i.e. sales office and a 32k sqft warehouse. The rationale of expanding into Laos is to strengthen Tiong Nam’s regional presence and to provide cross border logistics between Thailand and Vietnam. We note that the overall regional presence (ex-Malaysia, contributes less than 1% to logistics and warehouse segment) is currently loss making and we believe it to only contribute positively in the longer term (est. 5 years).

Forecast. We adjust our core earnings forecast to FY19: RM33.6m, FY20: RM32.6m and FY21: RM31.5m which shows a negative growth from FY18 to reflect the declining contribution form the property segment which is cushioned by an increase in warehouse utilisation rate estimates.

Maintain HOLD, TP: RM1.04 (from RM1.02) based on SOP as we adjust for better warehouse utilisation rate estimates while placing a higher discount of 20% (from 10%) to the REIT listing to reflect the unlikely occurrence in the near term. We believe the current market price has already reflected the earnings growth from logistic and warehouse segment and the drag from property development segment.

Source: Hong Leong Investment Bank Research - 7 Sept 2018