Second-half story

TNL’s 2QFY17 core net earnings grew 80% yoy, buoyed by a stronger contribution from the property development segment, bucking the slowdown in residential sales in the southern region. The logistics segment was flat on seasonality but should pick up progressively on customer additions. We expect lumpy earnings in 2H17 on RM220m of outstanding unbilled sales to underpin bottom-line growth. Maintain BUY.

Logistics business expected to pick up sequentially

Revenue rose 2.3% yoy to RM141m, largely due to a stronger contribution from the property development division, which recorded a 27% yoy increase in sales on the recognition of the ongoing flagship residential project in Johor Bahru, the Pinetree Marina Resorts Project. This partly negated the decline in logistics division revenue, which was weaker yoy due to the lack of festivities and by extension lower demand for logistics services. We expect logistics to be sequentially stronger, as the company recently secured new clients for its total logistics solution services, few of which should immediately commence contributions in 3Q.

Higher property contribution boosts earnings

In line with the higher revenue contribution, TNL booked core net profit of RM13m (+11% qoq; +80% yoy), after stripping out some RM0.3m impairment in receivables. The increased earnings were largely due to a decline in the effective tax rate in the current quarter, which fell 13ppt as 2QFY16’s tax rate was affected by one-off non-tax-deductible expenses. The 2Q earnings were also bolstered by a stronger contribution from the property development division, which is a higher-yielding business at a 42% EBITDA margin (vs logistics EBITDA margin of 12%). On the whole, the 1HFY17 results were within our expectations. We are expecting lumpy earnings recognition in 2HFY17 as TNL runs down its unbilled sales which stand at RM220m currently, translating into a comfortable 1.7x revenue cover for the property development division.

Maintain BUY

We continue to like TNL for its resilient and stable logistics business, with clear expansion plans and dominance in scale. The logistics business should pick up progressively on warehouse expansion and market-share gains over the longer term. The property development segment should be underpinned by the healthy revenue cover while low land costs should ensure margin visibility. Maintain BUY and SOTP-based 12M TP of RM2.10. Key risks are moderating global growth and weak property sales.

Source: Affin Hwang Research - 29 Nov 2016