INVESTMENT MERIT

TNLOGIS’s core business of logistics and warehousing is expected to show steady earnings growth on the back of warehouse expansions and high utilisation rate, with bottomline to be further lifted through sales recognition from property development. However, we believe positives have already been priced-in, even after ascribing TNLOGIS to premium valuations, taking into account its investment merits. Materialisation of its warehousing REIT will definitely serve as a major re-rating catalyst, with a hypothetical additional upside of RM0.32, but we opt to remain prudent over its realisation time-line. Therefore, for now, we are attaching a NOT RATED call on TNLOGIS, with a fair value of RM1.76.

Steady growth in logistics and warehousing. TNLOGIS adopts a strategy of targeting higher value customers that subscribe to its entire value-chain of transporting, logistics and warehousing. It operates a total of 75 warehouses across three countries, with total of 4.7m sq ft storage capacity. The company has expansion plans to further increase total storage capacity by 39% to 6.5m sq ft in three years. Given healthy utilisation at c.90%, this would exert a direct positive impact and we are projecting 11.9%/7.2% revenue growth for FY17E/FY18E, implying a 5-year CAGR of 11.2% since FY13. Coupled with our understanding that the company has secured two major contracts from foreign MNCs, improved margins are also expected due to the specialized services required.

Property development to boost bottom-line, expected to contribute 60.6%/64% of net profits in FY17E/FY18E, despite only making up 27%/30.4% of total revenue, due to high margins. Historically, it has always been operating with a PBT margin of c.40%, led by its low acquisition cost of its land bank. We suspect its land cost is below industry average of 15%- 20% of GDV. Despite only one new launch in the pipeline (GDV of RM170m, expected completion at 2020), forward earnings will be mainly buoyed by recognition of current unbilled sales of RM246.6m, as well as revenue recognition from sales of Pinetree Residence and Business Park @ SiLC 7 projects. Nonetheless, current undeveloped land bank stands at 152.6 acres, which TNLOGIS could tap into if there is an improvement in the property market. Management has guided that this would translate to approximately RM765m of potential GDV.

A Potential REIT-play? Management has expressed their intentions of disposing 31 warehouses (RM665m in value) into a REIT. Cash from the disposal will be used to pay off related debts of RM246m - arriving to a net cash impact of RM310m, after taking into account TNLOGIS’ suggested stake of 26%. Guided target yield is at c.6%. Comparatively, our in-house valuations have given its closest peer AXREIT a target yield of 5.45%. However, we reckon that it may only be finalised in late-FY18, given that it is still at early valuation stage. Thus, we have excluded it from our current valuation. Nonetheless, any substantial materialisation on the REIT would serve as a major re-rating catalyst. Our post-REIT hypothetical valuation gives a fair value of RM2.08 (32.0 sen premium to current fair value), after adjusting for logistics and warehousing earnings to exclude the warehouses, while including the net-cash impact from the REIT-spinoff into the valuation.

Not rated, with fair value of RM1.76, as positives have already been priced in, even after ascribing premium valuations derived from sum-of-parts (SoP). We ascribed a 14x forward PER on FY17 for its logistics and warehousing divisions, above other logistics peers’ averages, in view of its greater market cap and margins. Its property development is pegged to a 5x forward PER on FY17E earnings, above our in-house valuation of 4x for Johor property players, in view of its higher margins. Our valuation also included investments, valued on 1x forward BV. Risk to our call includes earlier-than-expected materialisation of warehousing REIT.

Source: Kenanga Research - 20 Oct 2016