Tiong Nam’s 9MFY19 result was below market and our expectations. Core net profit declined by 80% yoy on the back of lower property earnings, coupled with losses from the investment and hotel & dormitory divisions, which are partially offset by higher logistics earnings. We cut our EPS forecasts by 41-54% in FY19-21E mainly to reflect lower property earnings on the back of the soft property market. We maintain our SELL call with a lower TP of RM0.54.

Below Expectations

Tiong Nam’s 9MFY19 core net profit of RM5.6m fell below expectations, constituting 24% of consensus FY19 forecast of RM23.3m and 36% of our previous estimate of RM15.7m. Revenue declined by 7% yoy to RM453m in 9MFY19, mainly due to lower property revenue (56.2% yoy), partially offset by higher logistics and warehousing revenue (6.7% yoy). Its property segment continued to be negatively affected by the soft property market, weighing down the revenue growth in the logistics & warehousing segment from increased client base and expanding warehouse capacity.

Earnings Drag by Property, Investment and Hotel Businesses

Due to completion of most of its property projects, property revenue has declined by 72% yoy, which led to a 97.7% yoy lower profit before tax in 9MFY19 for the property division. Tiong Nam also incurred investment losses of RM2.7m, mainly due to fair value losses for its quoted investments. Its hotel & dormitory division has yet to be profitable given current low occupancy rate of 15%. Its logistics segment has recorded RM18.1m profit before tax in 9MFY19 compared to loss before tax of RM2.5m in 9MFY18. Tiong Nam is focusing on increasing its warehouse utilization which it targets to reach 90% by FY20E, improving its logistics division’s margin. However, its property earnings is expected to remain sluggish on the back of low unbilled sales and high property inventories close to RM440m.

Maintain SELL With TP of RM0.54

We cut our FY19-21E earnings by 41-54% mainly to account for the lowerthan-expected earnings. As such, we trim our RNAV-based TP to RM0.54 from RM0.60 and reiterate our SELL call on the stock. We believe its earnings will remain lackluster in the medium-term given prolonged weak property market and stiff competition in the logistics sector.

Source: Affin Hwang Research - 19 Feb 2019