Tiong Nam’s logistics earnings are likely to grow on the back of warehouse expansion, an expanding client base and better utilisation. However, this should be offset by lacklustre property earnings due to slow inventory sales from the current weak property market. Overall, we expect FY19E core earnings to contract by 65% yoy before rebounding to a CAGR of 16% over FY19-21E. We downgrade our rating from HOLD to SELL on Tiong Nam with a lower TP of RM0.60.

Better Contribution From Logistics Segment

The performance of Tiong Nam’s logistics segment will likely improve in 2H FY19 partly due to the start of its new warehouse in Seelong, Johor Bahru, in September 2018, which currently operates at full utilisation. Meanwhile, we expect the new warehouse in Laos with a total capacity of 32,000 sq ft to commence in June 2019 and contribute positively to the group’s FY20E revenue. In terms of profitability, the logistics’ EBITDA margin has improved to 12.8% in 1H FY19 (vs. 7.1% in 1H FY18) underpinned by better warehouse and fleet utilization, which has improved to 83% compared to 70% a year ago. For FY20E, management targets to achieve 90% warehouse and fleet utilization on the back of an expanded clientele base and growing requirements of existing customers.

Property Development Segment Drag to Earnings

The group plans to launch its new Kota Masai mixed-development project in March 2019 with a total gross development value (GDV) of RM150m, which should support property earnings growth for the next 2 years. Unbilled sales stood at RM2.4m, offering weak property earnings visibility. We expect property earnings to fall in 2H FY19 as compared to 1H FY19 as the domestic property market remains weak. Overall, we expect the group’s FY19E core earnings to contract by 57% yoy, mainly due to lower property earnings, which are partially offset by higher logistics earnings.

Downgrading to SELL With a Lower TP of RM0.60

We cut our FY19-21E core EPS by 23-39% mainly on softer property earnings. In turn, this prompts us to our lower RNAV-based 12-month TP of RM0.60 (from RM0.86), and downgrade our call from HOLD to SELL. We believe medium-term growth prospects will stay challenged given stiff competition in the logistics sector and a weak property market.

Source: Affin Hwang Research - 18 Feb 2019