Tiong Nam’s 9MFY18 result was below market and our expectations. Net profit declined 46% yoy to RM23.6m due to higher operating costs and investment losses. It incurred high start-up costs for its regional expansion and new last-mile delivery services. We cut our EPS forecasts by 8-20% in FY18-20E to reflect lower profit margin for its logistics business due to higher operating costs. We believe valuation is compelling following the share price correction. We upgrade our call to BUY from Hold with RNAV-based TP of RM1.36.

Below Expectation

Net profit of RM23.6m in 9MFY17 comprises 47% of consensus FY18 forecast of RM49.9m and 59% of our previous estimate of RM39.9m. Revenue grew 18% yoy to RM487m in 9MFY18, driven by both the logistics and warehousing (+15% yoy) and property development (+31% yoy) businesses. Rising demand for logistics services for existing and new customers and its regional expansion is driving strong revenue growth.

Losses for Logistics Business and Investments

However, higher operating costs (including depreciation) to build new warehouses and add trucks to expand its regional network (SingaporeThailand route) led to a loss before tax of RM2.5m in 9MFY18 for the logistics division. Tiong Nam also incurred investment losses of RM8.5m in 9MFY18, mainly due to fair value losses for its quoted investments. Its property development division was the star performer, contributing PBT of RM50.5m (+31% yoy) as sales picked up. Tiong Nam is focusing on selling its completed property inventories worth RM258m at end-2017.

Upgrade to BUY With TP of RM1.36

We believe the long-term prospects for the new business lines are good given rising demand for logistic services from fast-growing e-commerce activities. We expect EPS to rebound 30% yoy in FY19E with an expected turnaround for its logistics business and higher property earnings. We upgrade our call to BUY from Hold as FY19E core PER of 8x is compelling, given 2-year core EPS CAGR of 22%. FCF is reduced following the cut in our EBITDA forecasts but this is partially offset by the positive DCF impact from rolling forward the valuation base year to FY19E. We trim our RNAVbased TP to RM1.36 from RM1.38.

Source: Affin Hwang Research - 27 Feb 2018