FY18: Investment Loss Drags Down Results

Tiong Nam’s FY18 results were below market and our expectations. Net profit declined 63% yoy to RM31m due to higher operating costs, depreciation and investment losses, though core earnings were within our expectations, declining 18% yoy in FY18. It incurred high start-up costs for its regional expansion and new last-mile delivery services. We cut our EPS forecasts by 13-14% for FY19-20E to reflect lower profit margins for its logistics and property businesses and a higher effective tax rate, and lower our 12-month RNAV-based target price to RM1.25. We maintain our BUY rating based on its current compelling valuation and good long-term prospects.

Below Expectations

FY18 net profit of RM30.5m was 37% below the consensus forecast of RM48.7m and 17% below our estimate of RM36.8m. We were surprised by the net exceptional loss of RM14.9m and slightly lower EBITDA margin. However, revenue and core net profit were within our expectations. Revenue grew 15% yoy to RM658m in FY18, driven by both the logistics (+13% yoy) and property development (+18% yoy) businesses. The strong revenue growth is driven by rising logistics services demand and its regional expansion.

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 RM1.9m in FY18 for the logistics division. Tiong Nam also incurred investment and other losses of RM15m in FY18, mainly due to fair-value losses for its quoted investments. Its property development division was the star performer, contributing PBT of RM71.4m (+21% yoy) on higher sales. Tiong Nam is focusing on selling its completed property inventories, worth RM157m at 31 March 2018.

Maintain BUY

We believe the long-term prospects for the new business lines are good given rising demand for logistics services from fast-growing e-commerce activities. We expect EPS to rebound 23% yoy in FY19E with an expected turnaround for its logistics business while property earnings ease on lower inventory sales. Its FY19E core PER of 9x is compelling, given forecast 3- year core EPS CAGR of 16%. FCF is reduced following the cut in our EBITDA forecasts. We trim our RNAV-based TP to RM1.25 from RM1.36.

Source: Affin Hwang Research - 30 May 2018