We cut TNLOGIS to UNDERPERFORM with a lower target price of RM1.00, following another earnings disappointment in 3Q18 owing to losses at its logistics and warehousing segment due to increased costs on business expansions. As such, we lowered FY18/FY19 estimates by 15%/45% to account for the increasing earnings uncertainty. Moving forward, we are concerned over the group’s earnings visibility in the near-term for both its core logistic and property development businesses.

Below expectations. 9M18 core net profit (CNP) of RM31.5m (arrived after mostly stripping off gains and losses from quoted investments) came in below expectations at 66%/63% of ours/consensus full-year forecasts. The disappointment was mainly from its logistics and warehousing segment, which piled into cumulative losses during the year. No dividends were announced, as expected.

Yearly earnings sustained by property development. Cumulatively, 9M18 CNP declined 31% YoY, largely due to its logistics and warehousing segment plunging into losses before tax of RM2.5m for the year (as compared to PBT of RM20.4m in 9M17), coupled with higher effective tax rate of 34% (versus 20% in 9M17). This was partially offset by improved property development (segmental PBT +32% YoY) from recognition of unbilled sales. Similarly, for the individual quarter of 3Q18, CNP of RM10.7m is 28% lower YoY as its logistics and warehousing segment almost broke even (as compared to PBT of RM5.5m in 3Q17), coupled with a higher effective tax rate of 34% (versus 20% in 3Q17).

Sequentially dragged by property development. QoQ-wise, CNP was lower by 23%, mainly due to poorer property development earnings (segmental PBT -34% QoQ) as one of the company’s flagship projects (SiLC7) nears completion, coupled with the higher effective tax rate of 34% (versus 27% in 2Q18). However, results were slightly helped by improved performances from its logistics and warehousing segment, with segmental earnings almost breaking even (as compared to segmental losses before tax of RM3.9m in 2Q18).

Uncertain earnings outlook. We are mildly concerned over the group’s earnings visibility in both its core segments. Its logistics and warehousing segment has been mired in losses thus far during the year, due to increased fixed costs from business expansions. And while this may play out positively over the longer-run, we are wary over its dampening effects on near-term earnings. Meanwhile, for its property development, most of its unbilled sales (RM80.4m as at end 2Q18) are expected to be recognised in FY18. And with no firm launching of any new projects, earnings outlook also seems uncertain moving into FY19. All-in, we cut our FY18-19E earnings by 15-45%, as we (i) increased our costs assumptions for its logistics business, and (ii) cut our FY19 property sales assumption of its existing unsold units.

Downgrade to UNDERPERFORM, with lowered SoP-derived TP of RM1.00 (from RM1.40 previously). We switched our valuation methodology for its logistics and warehousing segment to 1x PBV (from 14x PER valuation previously), given the increased uncertainty in its earnings outlook. Our ascribed valuation is in line with its direct comparable peer TASCO, which also has similar net-gearing levels. Take note that our SoP-valuation also takes into account full dilution of its warrants (maturity in Dec 2018), representing a further 37% dilution to the share base. Risks to our downgraded call include: (i) lower-than-expected costs for its logistics and warehousing segment, (ii) higher-than-assumed property sales, and (iii) earlier-than-expected launches of new property projects.

Source: Kenanga Research - 27 Feb 2018