Tiong Nam posted a core net loss of RM0.2m in 1Q20, which was below expectations. This was mainly due to weaker-than-expected property earnings, which were affected by the soft market. On a qoq basis, core net loss narrowed by 98% on the back of revenue improvement across all segments and a better logistics margin. We expect earnings to improve in subsequent quarters supported by better logistics earnings, while its property and hotel segment earnings remain soft. We lower our FY20-22 core EPS forecasts by 1- 6% to reflect the lower-than-expected results and maintain our SELL call with an unchanged RNAV-based target price (TP) of RM0.33.

Below Expectations

Tiong Nam posted a core net loss of RM0.2m in 1Q20 which was below expectations, compared to the consensus and our previous core net profit forecasts of RM10.1m and RM5.9m, respectively. Revenue was down 3% yoy, mainly due to lower property revenue (-76% yoy). This was partially offset by higher logistics revenue (+9.1%) and contribution from its hotel & dormitory segment. The EBITDA margin was lower by 3.9ppt to 14.7% due to a lower property development margin (-7ppt) and losses from its hotel & dormitory segment, partially offset by a better logistics margin (+2.7ppt).

Core Net Loss Narrowed by 98% Qoq

Tiong Nam recorded net profit of RM1.9m vs. a net loss of RM10.3m in 4Q19. Revenue increased by 10% qoq due to: (i) higher logistics revenue (5% qoq), resulting from new customers secured and an increase in activities from its existing customers; (ii) higher property development revenue (6x qoq) from sales of inventories, and (iii) higher hotel revenue due to a higher occupancy rate of 30%. Excluding one-off items, Tiong Nam recorded a core net loss of RM0.2m in 1Q19. Though the logistics EBITDA margin improved to 15.1% (vs. 11.9% in 4Q19), its bottom line was dragged down by losses from the property and hotel segments.

Lowering Our FY20E Core EPS by 6%

For subsequent quarters, we expect earnings to improve on the back of a better logistics performance. However, earnings for its property and hotel segments are expected to remain soft, posing a downside risk to group earnings. Overall, we lower our FY20-21E core EPS by 1-6%, mainly to account for the lower-than-expected property earnings. This is partially mitigated by better logistics EBITDA margin assumptions of 14-15%.

Maintain SELL and 12-month TP of RM0.33

We reiterate our SELL call with an unchanged RNAV-based TP of RM0.33. We believe property earnings will remain sluggish on the back of high property inventories of around RM200m and no unbilled sales, while the hotel and dormitory segment will remain in the red due to low occupancy rates. However, we expect an improved logistics & warehousing margin to be sustained from better warehouse utilization and increasing business from its new and existing clients. 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 - 26 Aug 2019