Despite improved quarterly results, 1H18 came below expectations, dragged by logistics segment due to operational set-up costs. However, the segment is expected to turn around in the coming few quarters as utilisations for new ventures start to pick up. Meanwhile, near-term earnings are expected to be lifted by unbilled sales recognition in property development. Following 7-10% cut in FY18-19E earnings forecasts, we maintain MARKET PERFORM with lowered SoP-TP of RM1.40.

Below expectations. 1H18 core net profit (CNP) of RM20.8m (after mostly stripping-off gains and losses from quoted investments) came in below expectations at 41% and 39% of our and consensus FY18 fullyear earnings forecast, respectively. The disappointment was mainly from its warehousing and logistics segment, which plunged into losses at the PBT-level due to set-up costs incurred for new ventures. No dividends were announced, as expected.

Earnings helped by property development. 2Q18 CNP of RM13.8m improved YoY by 6% from RM13.1m in 2Q17. The improved results were driven by its property development segment, which saw segmental PBT almost doubling to RM25m from RM12.5m, mainly due to unbilled sales recognition. This was offset by logistics and warehousing segment, which plunged into losses before tax of RM3.9m, as compared to PBT of RM4.2m in 2Q17. The same explanation applies on a sequential basis as well. QoQ, 2Q18 CNP almost doubled from RM6.9m in 1Q18. Property development segmental PBT jumped 2.8x from RM8.9m last quarter, while logistics and warehousing plunged into losses from segmental PBT of RM1.3m last quarter. However, on a cumulative basis, 1H18 CNP was weaker by 27% from RM28.4m in 6M17, largely due to the poor 1Q18 results (recall that 1Q18 CNP came in -55%/-46% YoY/QoQ). Similarly, main drag is from the logistics and warehousing segment, with 1H17 segmental PBT of RM15m deteriorating into losses before tax of RM2.5m for 1H18.

Logistics dragged by set-up costs. From our understanding, losses seen in TNLOGIS’ logistics and warehousing segment thus far is mainly due to operational setup costs (e.g. manpower, warehousing and vehicles rental, etc) for its new ventures, which include: (i) warehousing capacity expansions, (ii) cross-border trucking routes, and (iii) ecommerce delivery under the brand name “Instant”. With that said, TNLOGIS should be able to break-even in the coming few quarters as utilisations start to pick up. On the other hand, near-term earnings should be lifted by its property development segment, through recognition of unbilled sales (RM119m as at end-1Q18).

Maintain MARKET PERFORM. Following the disappointing results, our FY18-19E earnings are cut by 7-10%, as we have factored in poorer performances from its logistics and warehousing segment. Consequently, our SoP-TP is lowered to RM1.40 (from RM1.60 previously), based on unchanged valuations of: (i) 14x PER on FY19E EPS for logistics and warehousing segments, (ii) 5x PER on FY19E EPS for property development, and (iii) 1x PBV on investments. Given the high net-gearing of 1.1-1.2x, we also do not discount the possibility of TNLOGIS potentially spinning-off its warehouses in efforts to pare down gearing levels. At current levels, net-gearing is in-line with one of its comparable peers, TASCO, but greatly higher than CENTURY, which is at a net-cash position. Risks to our call include: (i) slower-than-expected recovery of logistics and warehousing segments, and (ii) slower-than-expected sales and earnings recognition from its property development.

Source: Kenanga Research - 28 Nov 2017