INVESTMENT HIGHLIGHTS

• 9MFY17 results below forecasts

• Lower logistics revenue was expected

• Logistics margins are likely to improve going forward

• Property development segment continues to be a drag

• Maintain BUY with lower TP of RM1.93

9MFY17 results below forecasts. Tiong Nam reported cumulative 9MFY17 core PAT of RM43.2m (-4%yoy) which fell short of estimates, representing 48% of our and 52% of consensus’ full year forecasts. The shortfall in earnings was mainly due to an increase in depreciation and interest expenses while lower contributions from the property development segment did not help either. For the third quarter of FY17, both revenue and core PAT fell by -20%yoy and -28%yoy respectively.

Lower logistics revenue was expected. Cumulative 9 month revenue for Tiong Nam’s core logistics and warehousing business fell -3%yoy to RM330m which came as no surprise to us. We understand that management has been gradually winding down its container haulage business due to low margins in the segment. In addition, they have been reviewing smaller logistics client accounts that have little scope of scaling up in volume in favour of larger MNCs.

Logistics margins are likely to improve going forward. While efforts have been made to improve the margins for its logistics segment, this has not immediately materialised due to higher depreciation, interest and overhead costs incurred for new warehouses. Coming on stream, is its new fully automated warehouse (100k sq. ft.) which requires large equipment investments. Tiong Nam is adding an additional 520k sq. ft. in FY17 on top of its current 4.7m sq. ft. facilities. We believe that margins should improve once its newly constructed warehouses are put to use.

Property development segment continues to be a drag. Unbilled sales for the segment fell to RM167.3m as at Dec 2016 from RM246.6m as at June 2016 as key projects including Tiong Nam Business Park SiLC 7 approaches full completion. Meanwhile, the planned launch of Tiong Nam’s landed residential project in Kota Masai with estimated GDV of RM170m has been delayed slightly from its initial plan to launch in Dec 2016.

Source: MIDF Research - 21 Feb 2017