TNLOGIS recorded poorer FY18 results as logistics operations plunged into losses, with core earnings almost solely derived from the unbilled sales recognition from property development. Given the lack of earnings visibility, we slashed our FY19E earnings, while introducing FY20E numbers. Downgrade to UNDERPERFORM, with a lower SoP-TP of RM0.90. The group’s high net gearing of 1.1-1.2x is also a slight concern.

FY18 results broadly within our expectations. FY18 core net profit (CNP) of RM41.6m came in broadly within expectations at 95% of our full-year forecasts. However, the results were below market’s expectation, accounting for only 85% of consensus estimates. We believe the mismatch was due to over-optimism from the market towards TNLOGIS’ logistics operations, which plunged into losses during the year. No dividends were announced, as expected.

Logistics plunging into losses. FY18 CNP registered 27% lower YoY as its logistics and warehousing segment plunged into losses before tax of RM1.9m (as compared to segmental PBT of RM20.8m in FY17), despite segmental revenue growing by 12% YoY. We believe the losses were due to increased operating costs, depreciation and amortisation expenses from continued business expansions. Meanwhile, its property development saw its segmental PBT jumping 21% YoY, in-line with segmental revenue growth of 23% from greater unbilled sales recognition. As for the individual quarter of 4Q18, quarterly CNP of RM9.9m stayed almost flat YoY but declined 8% QoQ due to increased tax expenses by 40%, with an effective tax rate of 49.6% for the current quarter against 34.4% in the previous quarter.

Earnings risks going into FY19. Despite FY18 results coming in broadly within expectations, we still opted to slash FY19E earnings by 55%, while introducing FY20E numbers. We believe TNLOGIS will face huge earnings risks going into FY19. With its logistics operations plunging into losses in FY18, group earnings were almost solely contributed by its property development segment, which in turn derived most of FY18 segmental earnings through unbilled sales recognition (instead of sales of new properties). From our understanding, most of the group’s unbilled sales had already been recognised in FY18, and thus, we see very little earnings visibility going into FY19, especially given the lack of any new launches in the immediate-term, coupled with poor take-up rates for existing projects. Therefore, we believe any contributions to earnings moving forward have to come from either (i) turnaround in its logistics segment, or (ii) new property sales in its property development segment.

Downgrade to UNDERPERFORM, given lack of earnings visibility going into FY19, coupled with high net-gearing levels of 1.1-1.2x being slightly worrisome. Following the earnings adjustments, our SoP-TP was also lowered to RM0.90, from RM1.00 previously. Risks to our 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 - 30 May 2018