Despite an improvement in revenue by 8% YoY, 1Q18 results disappointed with CNP deteriorating 55% YoY, mainly due to setup costs incurred for its transnational logistics and other ventures. As such, we slashed our FY18- 19E earnings forecasts by 23-9% to account for higher logistics expenses. The company is expected to continue its logistics and warehousing segments expansion, having allocated RM100m capex for FY18. Meanwhile, property development earnings will be helped by unbilled sales of RM132.5m (as at end-FY17). Maintain MARKET PERFORM with slightly lower TP of RM1.70.

Below expectations. 1Q18 core net profit (CNP) of RM6.9m (arrived after stripping-off gains and losses from quoted investments) was a disappointment, coming in at only 8% and 9% of our and consensus full-year forecasts, respectively. This was mainly due to the higher-thanexpected expenses during the quarter from setup costs incurred for its transnational logistics. No dividend was declared, as expected.

1Q18 down due to higher expenses. Revenue for the quarter improved 8% YoY, from RM131.1m in 1Q17 to RM140.9m in 1Q18, mainly due to increased logistics and warehousing activity. However, CNP plunged 55% YoY, from RM15.3m in 1Q17, mainly from setup costs incurred for its transnational logistics ventures and new warehouses expansions. This led to a significant increase in overhead expenses (+102%), from RM8m to RM16.1m, as well as other expenses, such as direct operating expenses (+14%), depreciation (+34%), and finance costs (+19%). Effective tax rate was also significantly higher during the quarter (70% in 1Q18 vs 22% in 1Q17). Sequentially, 1Q18 CNP declined 46% QoQ from RM12.9m in 4Q17 to RM6.9m, mainly due to the aforementioned increase in overhead expenses. This was also coupled with weaker property development earnings, with segmental PBT deteriorating by 48% QoQ, from RM16.9m to RM8.9m, on the back of higher unbilled sales recognition in the last quarter.

Logistics to continue expansion. TNLOGIS is set to expand its warehousing capacity to 7.1m sq ft by FY20, from an estimated capacity of 5.3m sq ft as at end-FY17. On other logistics fronts, its expansions into cross-boarding trucking, coupled with its venture into ecommerce delivery services under the brand name “Instant” are seen as longer-term prospects play, with the gestation phases being dragged down by running costs. Overall, the company has allocated RM100m capex in FY18 for these expansion plans. Meanwhile, for its property development, FY18 segmental earnings are expected to be partially supported by its unbilled sales of RM132.5m (as at end-FY17). However, we believe that take-up rates for its property development projects will remain subdued over the longer-term.

Maintain MARKET PERFORM. Following the earnings disappointment, we trimmed FY18-19E earnings forecasts by 23-9% to account for higher expenses in its logistics and warehousing divisions. Our SoP-TP is also lowered slightly to RM1.70 (from RM1.71 previously) as we roll forward our valuation base-year to FY19. With that, we maintain our MARKET PERFORM call. Risks to our call include (i) drastically higher-than-expected expenses from its logistics segment, and (ii) slower-than-expected sales and earnings recognition from its property development.

Source: Kenanga Research - 29 Aug 2017