TNLOGIS? primary business of logistics and warehousing is expected to show steady growth on the back of warehouse capacity expansions, with bottom-line to be further lifted by its property segment. While we believe foreseeable positives have already been priced-in at this juncture, we anticipate potential further upside from its warehousing REIT. As such, we are initiating coverage on TNLOGIS with a MARKET PERFORM call and TP of RM1.71. Total logistics service provider. TNLOGIS currently operates 77 warehouses with total storage capacity of 4.9m sq ft, making it the largest warehouse operator in the country. Strengthening its competitive advantage, the company is undertaking further capacity expansion of 50% to 6.5m sq ft by end FY19. Coupled with utilisation rates of 80-90%, we believe this would exert positive earnings impact as we forecast a 6-25% revenue growth on the segment in FY17-19, implying a 3-year CAGR of 13%.

Property development to boost bottom-line, expected to contribute 69-71% of net profits for FY17-19, despite only making up 20-31% of revenue, due to favourable margins. It has always been operating at a PBT margin of c.40%, led by low acquisition cost of its land bank, which we suspect to be much lower than industry average of 15-20% of GDV. Despite having only one project in the pipeline (GDV of RM170m, expected to launch in FY18), forward earnings will be sustained through revenue recognition of its unbilled sales, as well as sales of its Pinetree Residence and Business Park @ SiLC 7 projects.

Tapping into China?s e-commerce logistics. TNLOGIS is looking to launch land trucking routes between China and ASEAN countries, attempting to give traditional transportation via land and sea freights a run for the money. Targeting mainly e-commerce providers from China, expected commencement of operations is set to be in FY18, with an expected initial capex outlay of RM10m for additional warehouses. While we do not expect a huge earnings contribution from the early stages of the venture, the growth potential seems promising in the long run, leveraging on the booming e-commerce in the region.

Warehousing REIT as potential rerating. TNLOGIS?s intentions of spinning-off some of its warehouses into a REIT have been no secret. We expect the company to dispose 31 warehouses into the REIT (tentatively valued at RM665m). Cash from the disposal would be used to settle related debt of RM246m ? arriving to a book value holding of RM109 (RM0.26/share) based on our preliminary calculations, after taking into account TNLOGIS? assumed eventual stake of 26% on the REIT. Given that it is now still at early valuation stage, we are taking a prudent stance over the materialisation timeline, expecting it to finalise only by late-FY18, and thus, have excluded it from our current valuations.

MARKET PERFORM with SoP-based TP of RM1.71. We ascribed a 14x forward PER on FY18E for its logistics and warehousing segments, above peer average of 12x. Its property development is pegged to a 5x forward PER on FY18E, above small-mid-cap property players? average of 4x. Despite ascribing premium valuations, TNLOGIS seems fairly priced at this juncture, at a target price of RM1.71/SoP share. On the other hand, our post-REIT hypothetical valuation arrives to a fair value of RM1.87, an additional RM0.16 upside from our current TP. Risks to our call includes: (i) higher-than- expected volume growth, (ii) earlier-than-expected realisation of warehousing REIT.

Source: Kenanga Research - 15 Feb 2017