Tiong Nam posted a core net loss of RM5.7m in FY19, which was below consensus and our expectations. This was mainly due to lower property earnings, coupled with losses from its investment holding and hotel & dormitory segments, partially offset by better logistics & warehousing earnings. Depreciation and interest costs were higher during the year partly due to the expansion of its logistics & warehousing and hotel & dormitory divisions. We cut our EPS forecasts by 27-32% in FY20-21E to reflect lower property earnings on the back of the soft property market. Maintain SELL with a lower RNAV-based target price (TP) of RM0.33.

Below Expectations

Tiong Nam posted a core net loss of RM5.7m in FY19 which was below expectations, compared to consensus and our core net profit forecasts of RM11.6m and RM6m respectively. This was mainly due to higher depreciation (+20% yoy), higher interest expense (+24% yoy) and higher effective tax rate. FY19 revenue declined by 10% yoy to RM589.9m, mainly due to lower property revenue (-68% yoy), partially mitigated by better logistics & warehousing revenue (+6% yoy). EBITDA margin was lower by 5.6 ppt to 13.9% in FY19 due to lower property development margin (-17.9 ppt) and losses from its hotel & dormitory segment, partially offset by better logistics margin (+4.5 ppt).

Logistics Business Turns Profitable But Other Segments Were Weaker

Its logistics business recorded pre-tax profit of RM22.5m in FY19 compared to pre-tax loss of RM1.8m in FY18 on the back of improved revenue from expanded warehouse capacity, expanded client base, improved business from existing clients and better warehouse utilization rate of around 85%. However, property development pre-tax profit fell to RM0.2m (vs. RM67.3m in FY18) due to completion of most of its property development projects, limited new launches in the pipeline given the soft property market and higher depreciation and finance costs. Its Kota Masai phase 1 project with estimated gross development value of RM150m is targeted to launch by the end-2020. But, we think that this is not sufficient for a rebound in Tiong Nam’s property earnings given the prolonged soft property market. Its otel & dormitory business has yet to turn profitable (FY19 pre-tax loss of RM6.5m) given current low occupancy rate of 20%. Tiong Nam continues to incur investment losses but narrower at RM4.3m (- 61% yoy).

Source: Affin Hwang Research - 3 Jun 2019