There were no major surprises from our recent meeting with Tiong Nam and warehouse site visit. FY20E earnings are expected to be supported by its logistics & warehousing segment as demand remains healthy. Meanwhile, its property and hotel segments are expected to remain weak given the weak property market conditions. The FY20E PER is expensive at 42x. We reaffirm our SELL call with an unchanged RNAV-based 12-month target price (TP) of RM0.33.

Focus on Increasing Warehouse Utilisation and Yield

We gather that logistics and warehousing services demand remains good especially in the Klang Valley. Some of Tiong Nam’s existing customers from the F&B industry have taken up more storage space to cater for their increasing needs. As land is limited for warehouse expansion, Tiong Nam will focus on maximizing its existing warehouse space. Recently, the group installed a satellite-racking system in one of their warehouses, which increases floor utilization to 100%, compared to 40% for a conventional racking system. The group also aims to increase its clientele base with more specialized logistics and warehousing requirements, such as expanding cold-room warehouse facilities. Currently, its average warehouse utilisation is at a healthy 80%.

Unsold Residential Units Up for Rental

To mitigate the slowdown in the property market, the group marketed 100 of its unsold residential units for rental through Online Travel Agents (OTA). This generates recurring revenue of about RM200-300k per month, which should partially cover the segment’s depreciation and finance costs. That said, we expect Tiong Nam’s property earnings to remain lacklustre in FY20E given no unbilled sales, coupled with no new property launches.

Hotel, Last-mile Delivery and Cross-border Services Remain in the Red

Although its hotel occupancy rate has improved to 30% compared to 20% in February 2019, the segment is expected to remain in the red in FY20E. We gather that the occupancy rate needs to hit at least 50% for the hotel business to break even. Meanwhile, its last-mile delivery (i.e. Instant) and cross-border services are expected to continue incurring losses given the lack of economies of scale and high operating costs.

Net Gearing Remains High

Net gearing level remained high at 1.3x as at March 2019. Its plan to list its warehouses through a REIT has been deferred due to the weak property market. However, the current net gearing should be manageable given its positive operating cash flow and low average financing cost of about 4.7% p.a. in FY19E. Capex is expected to be minimal at about RM20m in FY20E, mainly for maintenance purposes.

1QFY20 Results Expected to Improve Slightly

Tiong Nam’s 1QFY20 results are expected to be announced on 27 August. We expect the earnings to be better qoq supported by improved logistics & warehousing revenue, but partially offset by flat property and hotel earnings.

Maintain SELL

We make no changes to our FY20-22E earnings. We expect the group earnings to be supported by the logistics segment in the short to mediumterm given the current property market downturn. However, there is a lack of potential upside catalysts, in our view. In addition, the FY20E PER of 42x is expensive and earnings visibility remains weak, mainly due to the weak property market. We reaffirm our SELL call with an unchanged TP of RM0.33.

Key Risks

Key upside risks to our SELL call: (1) industry competition eases in the logistics sector; and (2) stronger-than-expected property sales.

Source: Affin Hwang Research - 16 Aug 2019