Tiong Nam’s 1HFY19 core net profit of RM8.2m(-46% yoy) accounted for only 21% and 15% of FY19E consensus and our previous forecasts respectively. With earnings below expectations, we cut our FY19-21E EPS by 50-63%. We downgrade the stock to HOLD from Buy with lower RNAV-based TP of RM0.86.

Below Expectations

Tiong Nam’s 1HFY19 core net profit of RM8.2m (-46% yoy) was below expectations, constituting 21% and 15% of FY19E consensus and our previous estimates respectively. Revenue declined 2% yoy to RM307.2m, mainly due to lower property development revenue (-41% yoy) given most of the group’s property development projects are at the tail end. This was partially offset by higher logistics & warehousing revenue (+8% yoy) given its increasing clientele base for the segment. PBT margin contracted to 4.3% in 1HFY19 compared to 7.6% in 1HFY18 given higher depreciation (+14% yoy), higher interest expense (+58% yoy) and lower property development earnings, which usually commands better profit margin compared to the logistics & warehousing segment.

Sequentially, Core Net Profit Declined by 99%

Despite a marginal 2% qoq decline in revenue in 2QFY19, core net profit was significantly lower by 99% qoq. This is partly due to lower property segment revenue (-46% qoq), partially offset by higher logistics & warehousing revenue (+6% qoq). PBT margin was 1.6ppt qoq lower due to lower property development margin, higher interest expense and higher depreciation. We believe profit margin will continue to be under pressure due to the weak property market and higher depreciation and interest costs. The opening of a new warehouse should boost earnings in 3QFY19.

Downgrade to HOLD With Lower TP of RM0.86

Given the lower-than-expected results, we cut our FY19-21E earnings by 50-63% as we reduce our profit margin assumptions for the property development segment and cut our assumptions on its warehouse capacity growth. We increase our WACC assumptions from 7.1% to 7.5% to reflect higher average interest rate for its debts and cut our 12-month RNAVbased TP to RM0.86. We like Tiong Nam for its long-term prospects as an upcoming regional integrated logistics provider but start-up costs will hold back medium-term growth prospects.

Key risks

Key upside/downside risks to our HOLD call: (1) higher/lower-thanexpected warehouse occupancy rate; (2) easing/intensifying industry competition impacting yields; and (3) strong/weak property sales.

Source: Affin Hwang Research - 27 Nov 2018