Tiong Nam’s 9MFY20 results were within our expectations, but below consensus’. Its 9MFY20 core net profit declined by 33% yoy due to higher depreciation (+47% yoy) and interest expense (+7% yoy). Similarly, on a sequential basis, earnings fell 21% qoq on the back of flattish revenue, coupled with higher depreciation (+4% qoq). We understand that there is an uptick in terms of logistics & services demand in the 4Q following the corona virus event, as people start to stock up. However, this is expected to be temporary. Overall, we maintain our SELL call in view of the challenging outlook, especially for its property and hotel segments.

Within Our Expectations

Tiong Nam posted core net profit of RM4m in 9MFY20, which made up of 51% and 69% of the consensus and our previous forecasts, respectively. Revenue was up 1.8% yoy in 9MFY20 due to higher logistics & warehousing revenue (+3% yoy), hotel & dormitory revenue of RM9.7m, which was partially offset by lower property revenue (-25% yoy). EBITDA margin improved in 9MFY20 by 2.1ppts contributed by profit margin improvement for its logistics & warehousing and property segments. We deem the result as within our expectation as we expect the group’s quarterly earnings to be sustained in 4QFY20 supported by sustained logistics & warehousing demand, and unsold property GDV of RM300m.

Core Net Profit Drop 21% Qoq

On a sequential basis, the group posted core net profit of RM2.5m in 3QFY20 (-21% qoq) mainly due to higher depreciation (+4% qoq) and tax expense (1.2x qoq). Revenue was marginally higher (+0.2% qoq) on the back of higher logistics & warehousing revenue (+1% qoq) and higher hotel & dormitory revenue (+20% qoq), which was mostly offset by lower property revenue (-8% qoq).

Maintain SELL

We make no changes to our FY20-22E earnings. We reiterate our SELL call on the stock with an unchanged RNAV-based target price of RM0.36. We remain cautious on the stock as earnings visibility remains limited for its property and hotel segments. Key risks to our SELL call: (1) stronger-thanexpected property sales, and (2) industry competition eases in the logistics sector.

Source: Affin Hwang Research - 25 Feb 2020