Tiong Nam’s revenue increased 23% yoy to RM173m in 2QFY18, whilst net profit was flat at RM13m. 1HFY18 net profit constitutes 26% and 34% of consensus and our FY18 forecasts respectively. Core net profit of RM24m (+6% yoy) in 1HFY18 is tracking above our expectation but we were surprised by net exceptional losses of RM10.5m. Both logistics/warehousing and property development segments saw higher revenue. However, net profit was flat in 2QFY18 due to higher operating costs as the company expanded regionally by building new warehouses and sales offices, and higher tax rate. Maintain HOLD with lower RNAV-based TP of RM1.38.

Strong Revenue Growth

Tiong Nam’s total revenue rose by 23% yoy to RM173.4m in 2QFY18. The revenue from the logistics and warehousing segment recorded an increase of 19% yoy to RM126.2m as the company has secured new customers for this segment and higher sales order from its existing customers. Revenue for the property development segment increased 32% yoy to RM47.0m in 2QFY18 compared to RM35.5m in 2QFY17. The increase in revenue was due to higher progress billings for its flaghip project Pinetree Marine Resorts Project in Johor Bahru.

Decline in Net Profit

The company recorded lacklustre performance for 1HFY18. Despite a 15% yoy growth in revenue in 1H18, net profit dropped by 48% yoy on the back of i) 17% yoy increase in operating costs as the company builds new warehouses/sales offices and ventures into the last-mile delivery service, ii) higher depreciation from the warehousing and logistics segment, and iii) higher tax rate as certain expenses are not deductible. The logistics and warehousing sector will likely remain challenging as other logistics companies are also increasing their capacity.

Maintain HOLD With Lower TP of RM1.38

As the company is venturing into the last-mile delivery service, we increase our WACC assumption for the logistics and warehousing segment from 6.0% to 6.7%. We make no changes to our earnings forecast as we expect a seasonally stronger 2H result if no further exceptional losses are incurred (RM10.5m in 1HFY18). Maintain HOLD with a lowered RNAV-based TP of RM1.38. Risks: moderating global growth and weak property sales. This note marks a transfer of analyst coverage.

Source: Affin Hwang Research - 28 Nov 2017