Tiong Nam’s 1Q18 revenue increased by 7.5% yoy to RM140.9m whilst core net profit fell by 58.8% yoy to RM5.4m, constituting 7.5% of our and 6.7% of consensus FY18E estimates. Tiong Nam’s lacklustre earnings performance is due to higher operational costs, depreciation and other overhead expenses. With earnings below our and street estimates, we cut FY18-20E EPS by 4-44%. Downgrade to HOLD with a TP of RM1.68, based on SOTP valuation.

1Q18: Revenue Up 7.5% Yoy, Core Net Profit Down 58.8% Yoy

Tiong Nam’s total revenue rose by 7.5% yoy to RM140.9m. The revenue from the logistics and warehousing segment, which accounts for 86.6% of total revenue in 1Q18, recorded an increase of 13% yoy to RM122m, whilst revenue from the property development segment fell by 18% yoy to RM18.8m. The construction progress for SILC 7 is nearing completion, resulting in lower project development revenue. 1Q18 core net profit dropped significantly, down 58.8% yoy from RM13.1m in 1Q17 to RM5.4m in 1Q18. This is mainly due to higher operational cost (+15.6%) and depreciation from the logistics and warehousing segment (+33.5%), resulting in a decline of EBIT margin by 6.8ppts yoy.

1Q18 PBT Down 91.5% Qoq

In sequential terms, Tiong Nam posted a lower pre-tax profit of RM3.8m, a significant decline of 91.5% qoq compared to the pre-tax profit of RM44.6m in 4Q17. The sharp decline was due to a loss in fair value of quoted shares of RM8.8m (4Q17: gain of RM16.6m) and a lower gain in disposal of quoted shares of RM2.6m (4Q17: RM8.8m). Core net profit was down 67% qoq due to i) flattish revenue from logistics and warehousing segment (+0.1% qoq); ii) falling revenue from property development (-55.2% qoq) and iii) higher finance costs (+8.2% qoq)

Downgrade to HOLD With TP of RM1.68

We cut our FY18-20E EPS by 44%/4%/16% due to rising operational costs. Downgrade from BUY to HOLD with a lowered TP of RM1.68. Risks: moderating global growth and weak property sales.

Source: Affin Hwang Research - 29 Aug 2017