TNLOGIS 9M17 results were disappointing, dragged mainly by slower-than-expected property development earnings. Having said that, 4Q17 is still expected to come in stronger than last year given the low base effect. Accordingly, we trimmed FY17 estimates by 16% on this weak set of results, but keeping our FY18 estimates. While earnings are still expected to record double-digit growth, we believe TNLOGIS is fairly priced at this juncture. Maintain MARKET PERFORM, with unchanged TP of RM1.71

Below expectations. 9M17 results came in below expectations, accounting for only 60%/55% of our/consensus FY17 forecasts, with core net profit of RM43.8m. This was mainly due to slower-than- expected earnings for property projects, which came in at a segmental PBT of RM38.4m, making up only 53% of our previous full-year estimate. No dividends were announced, as expected.

Weaker YoY, but stronger QoQ. 3Q17 CNP of RM17.3m was down YoY by 22%, mainly due to its poorer margin from its logistics and warehousing segment led by higher fixed expenses, leading to segmental PBT decreasing by 59%, despite segmental revenue only dropping by 15%. QoQ-wise, CNP improved by 32% mainly on the back of downward revisions on projected construction cost for one of its projects, more specifically the Business Park @ SiLC 7 project.

Cumulatively, 9M17 was rather flattish, coming in slightly higher than 9M16?s RM43.1m. This was despite an overall revenue decrease of 8%, mainly offset by: (i) lower direct operating expenses, and (ii) lower NCI and tax expense.

Lowered FY17E earnings forecast by 16%. Following the 9M17 results that were below expectations, we decided to trim FY17E?s CNP forecast by 16% to reflect the slower property development earnings. However, the delayed recognition of unbilled sales will also have a cascading effect to FY18?s property sales assumption. We lowered both FY17-FY18 property sales assumptions, with the postponement of recognising FY17 sales to a later date to make up for the short fall in FY18. Thus, this does not affect our FY18 estimates.

Earnings growth still present. Despite the cut in earnings estimate, TNLOGIS is still expected to register 26-46% CNP growth in FY17-18, especially given the lower base last year. We expect 4Q17 earnings to come in stronger YoY, especially in its logistics and warehousing segment due to the higher utilisations expected from the increase in warehousing capacity coming from its expansion plans, which should increase its warehousing capacity by 8% by end-FY17. Meanwhile, we have also gathered that unbilled sales as at 3Q17 stood at RM167m, expected to be recognised over FY18, partially contributed by the delayed completion of its Pinetree Residence project.

Maintain MARKET PERFORM. We maintain our SoP-TP of RM1.71, derived from 14x Forward PER ascribed to its logistics and warehousing, while its property development is pegged to a 5x forward PER. Despite earnings expected to display double-digit growth, we believe foreseeable positives have already been priced-in at this juncture.

Risks to our call include (i) slower-than-expected property development earnings recognition, (ii) slower-than-expected execution of warehousing capacity expansions, and (iii) sooner-than-expected materialisation of its warehousing REIT.

Source: Kenanga Research - 21 Feb 2017