We returned from TNLOGIS?s briefing with a better understanding of its future plans. TNLOGIS is expected to continue with its warehousing expansion plan, which will increase capacity by >40% by end-2020. The company is also making efforts to tap into the e-commerce market through ventures into cross-border trucking and e- fulfilment services. On the other hand, take-up rates for its property development remain low on the back of a subdued market. Maintain MARKET PERFORM with unchanged TP of RM1.71.

Warehousing expansion plans. With current warehousing capacity of 4.9m sq ft operating near full utilisation, the company further reaffirmed its expansion plan. Warehousing capacity is expected to reach 5m sq ft in FY18, with the bulk of the expansion expected to come in at FY19 through multi-storey warehouses in Shah Alam, which would increase capacity by another 1.6m sq ft. This expansion pipeline would see total warehousing capacity increased to roughly 7m sq ft by end-2020 (>40% increase from current capacity), with an estimated total capex for FY18 to be around RM100m.

Tapping into e-commerce. With the company already making test- runs for its cross-border trucking routes in ASEAN, commencement of operations is set to be in 1Q18. Leading up to this, TNLOGIS has newly established distribution centres in Shenzhen, Hanoi and Yangon, with one more in Laos expected to be established in FY18. The company seeks to use this as a platform to further tap into the e- commerce last-mile delivery, making them a one-stop centre for e- fulfilment services, especially for e-commerce firms in China looking to sell goods into Malaysia/Singapore. While we expect earnings impact to be minimal for the initial phases due to gestation, we also believe this venture carries great potential given that TNLOGIS is one of the only few players to have direct trucking routes between China and Malaysia/Singapore. We expect capex outlay for its initial operating year to be c.RM10m, mainly for its sales office as well as new warehouse to support this operation.

Subdued property outlook. While FY18E property development earnings are expected to hold up, largely from the recognition of unbilled sales of RM167.3m, take-up rates have continued to remain low, especially for Business Park @ Batu Pahat 8 (GDV of RM221.4m, expected completion at end-FY17) and Pinetree Residence (GDV of RM461.9m, expected completion in early-FY18), with current take-up rates at 28.4% and 68.5%, respectively. Our earnings projection for FY18 implies a take-up rate of 53% and 80%, respectively, for the two projects, which we think is still subpar given that they are to be completed by FY18.

Maintain MARKET PERFORM. We made no changes to our FY17- 18E estimates. Our unchanged SoP-TP of RM1.71 is derived from: (i) 14x forward PER on FY18E for its logistics and warehousing segment, above peers? average of 12.5x, (ii) 5x forward PER on FY18 for its property development, above small-mid-cap property players? average of 4x. Despite ascribing premium valuations, TNLOGIS seems fairly priced at this junction. No updates were given for its warehousing REIT as it is still stuck in its valuation stage. Thus, we push back our expected timeframe of materialisation to FY19 from late-FY18. With that, we reiterate our MARKET PERFORM call.

Risk to our call includes: (i) weaker-than-expected property sales, (ii) slower-than-expected execution of warehousing expansions, and (iii) sooner-than-expected materialisation of its warehousing REIT.

Source: Kenanga Research - 08 Mar 2017