We returned from TNLOGIS’s briefing with a better understanding of its new ventures and expansions, but with a slightly more cautious view towards its near-term outlook. TNLOGIS is expected to continue its warehousing expansion plans, which is set to increase capacity by 35% by end-FY20. Meanwhile, the company’s new ventures into cross-border and last-mile delivery are seen as longer-term prospects, with current initial phases to be dragged down by setup and running costs. Property outlook continues to remain subdued as take-up rates are seeing no improvements. As such, we trimmed our FY18-19E earnings forecasts by 26-11% on lower new property sales assumption. Maintain MARKET PERFORM with lower TP of RM1.60.

Warehouse expansions to continue. With latest warehousing capacity standing at 5.9m sq ft as at end-FY17, TNLOGIS is expected to continue its warehousing expansion plans to eventually reach 7.1m sq ft (+35%) by FY20. Bulk of this expansion will come from the upcoming multi-storey warehouses in Shah Alam, contributing a total of 1.6m sq ft of additional warehousing capacity, with estimated commencement set in FY19. Overall, TNLOGIS has allocated RM100m capex for FY18 for the warehousing expansions and new ventures.

Higher expenses from new ventures. To recap, TNLOGIS posted higher operating and overhead expenses in its 1Q18 quarterly results, contributed by its new ventures into: (i) cross-border trucking, (ii) ecommerce delivery under the brand-name “Instant”, and (iii) commencement of new warehouses. Reflecting this, we believe these ventures to be longer-term prospects, with current infancy stages to be dragged down by setup and running costs. Nonetheless, margins should see some improvements in the coming quarters, buoyed by higher adoption and utilisation from these new ventures.

Subdued property market. Outlook for TNLOGIS’s property development segment seems to remain subdued at this juncture. Takeup rates for its on-going projects saw no major improvements over the last quarter, hovering at around 60%, despite all projects are due for completion in FY18. With that said, there is currently one new launch in the pipeline – mixed development in Kota Masai, with GDV of RM150m. Nonetheless, property revenue is also expected to be partially supported by unbilled sales of RM119m as at end-June 2017.

Maintain MARKET PERFORM. We trimmed our FY18-19E earnings forecasts by 26-11%, after lowering our new sales assumption for its property development to account for the subdued property sales outlook. Following that, our SoP-derived TP is also lowered to RM1.60 (from RM1.70 previously), with unchanged valuations of: (i) 14x PER on FY19E for its Logistics and Warehousing segment, and (ii) 5x PER on FY19E for its Property Development segment. Upside risks to our call and earnings forecasts downgrade include: (i) recovery in property take-up rates, (ii) exponential logistics earnings growth, and (iii) sooner-than-expected materialisation of its warehousing REIT.

Source: Kenanga Research - 7 Sept 2017