Good Start to the Year

Tiong Nam’s 1QFY19 results were within expectations as occupancy rates rebounded from FY18 lows. Favourable tax rate further boosted earnings growth. In contrast, property development saw a quiet quarter. Tiong Nam faces headwinds with a highly geared balance sheet and the property segment as a significant earnings contributor. However, it trades at undemanding valuations underpinned by long term structural growth. Maintain Buy and TP of RM1.25.

Within Expectations

Tiong Nam’s 1QFY19 core profit of RM8.1m (57% yoy) is in line with our and consensus expectations, at 15% of both estimates. Revenue grew 10% yoy, primarily driven by the property development segment (35% yoy) against higher property sales. Meanwhile, logistics and warehousing registered 6% revenue growth yoy, attributed to new customers for its warehousing. Warehousing has achieved an occupancy rate of ~70% (vs 60%+ previously).

Logistics Business Outweighs Property Development

1QFY19 Logistics and warehousing EBITDA margin gained +2.9ppt yoy, off higher occupancy rates and narrowing losses against a similar cost base. Going forward, trade restocking and a slated new warehouse due end-3QFY19, which has been fully taken up is expected to further boost margins. In contrast, property development EBITDA margins contracted - 16ppt yoy due to dilutive property sales, with flagship project, Pinetree Marine Resorts Project nearing completion. Coupled with a 1QFY19 favourable effective tax rate of 28% (1QFY18: 73%), core profit grew 57% yoy. However, adjusting for the effective tax rate, growth would have normalised to 10% yoy.

Other Key Developments

The proposed corporate exercise to dispose its properties to a REIT, in order to ease its gearing of 1.2x (as of 30 Jun 2018) is unlikely to materialise given the subdued property market. Meanwhile, Tiong Nam is expected to regain its Shariah compliance status in Nov 2019.

Maintain BUY

We like Tiong Nam for its undemanding valuations and long-term prospects as an integrated logistics provider, with a growing regional footprint. We maintain our BUY recommendation and our RNAV-based TP to RM1.25. Key downside risks to our BUY call: (1) lower-than-expected occupancy rate; (2) sustained stiff industry competition impacting yields; and (3) weak property sales.

Source: Affin Hwang Research - 28 Aug 2018