• Tiong Nam experienced a temporary fall in demand for logistics services

• Demand is set to pick up in 2017 and expansion plans are on track

• The company is venturing into cross-border trucking and last mile delivery services to enhance its core product offering

• Property development business will be subdued

• Maintain BUY with unchanged TP of RM1.93

We attended the Tiong Nam’s analyst briefing which was hosted by Mr. Victor Ong (ED) and Mr. Law Tik Long (CFO). Management updated analysts on the performance of its 9MFY17 results and business outlook covering its logistics & warehousing and property development segments. The company’s management also shed more light on its plans to expand its cross-border trucking business and e-commerce logistics division.

Overall, we maintain our positive view on the prospects of the logistics & warehousing business while maintaining our cautious view on the property development segment. Meanwhile, the cross-border trucking and e-commerce ventures could provide new avenues of growth for the company.

POLE POSITION IN INTEGRATED LOGISTICS

Temporary blip in demand. Tiong Nam acknowledged that it had received lower volume of orders for its core logistics and warehousing business in 9MFY17 due to a more cautious stance taken by its customers in light of uncertainty in the domestic economy which was exacerbated by volatile currency markets.

However, management noted that business has picked up since Nov-Dec 2016 as consumer sentiment improved. Looking ahead, we share management’s optimism that the segment should perform well in 4QFY17 and FY18 with resumption in external trade growth and improving consumer sentiment trickling down to integrated logistics service providers. Hence, our revenue growth forecast remains unchanged at +7% and +10% for FY18 and FY19 respectively.

Expansion plans unhindered. Having invested RM97m in 9MFY17 (12MFY16 capex: RM124m) to construct two new warehouses in Krubong (Melaka) and Tanjung Langsat (Johor), the company’s warehouse footprint increased 3% or 127k sq. ft. to 4.9m sq. ft. Utilisation rate of its warehouses maintained high at 93% hence its future expansion plans remains intact. Recall that the company plans to increase its warehouse space to 5.5m sq. ft. by FY18 and 7m sq. ft. by FY19. With its expansion plans on track, Tiong Nam is likely to retain its market leading position in integrated logistics for the foreseeable future.

CROSS-BORDER TRUCKING AND LAST MILE DELIVERY TO COMPLIMENT ITS CORE BUSINESS

Identified opportunities in cross-border trucking. With the bulk of Malaysia’s imports and exports being handled through sea and air freight, Tiong Nam has identified an opportunity in land transport: cross-border trucking. The service has several advantages such as a 5-7 day door-to-door transit time from Shenzhen to KL compared to 2.5-5 days by sea or 24 hours by air which deliver goods to the port and airport respectively. Goods transported by sea or air will then have to be picked up by trucks at the port or airport which would incur additional time and money. Meanwhile, trucks can make several stops along routes (Shenzhen-Hanoi-Yangon-Savannakhet-KL-Singapore) to pick up or deliver items, ensuring that vehicles are laden with goods and maximising the journey.

Distribution centers set up along the route. With distribution centers close to completion in Shenzhen, Hanoi, Yangon and Savannakhet, adding to its existing facilities in Thailand and Singapore, Tiong Nam expects the service to commence in FY18. Thus far, the service has received good response from clients with a couple of contracts secured with MNC companies. While contribution to earnings would be minimal in FY18 with an initial 25-30 trucks (out of its 2,349 vehicles fleet) plying the routes, we believe the service would be complimentary to its core integrated logistics business.

Venturing into the last mile delivery business. Tiong Nam would be launching its new courier service provider in 1QFY18 (2QCY17). Currently, the business is handling B2B clients for the delivery of parcels and documents. However, they aim to tap into the B2C market, riding the growth of the e-commerce industry. We believe the venture makes sense for Tiong Nam which is able to apply its strengths in warehousing and trucking. In essence, Tiong Nam would be able to provide an end-to-end logistics service, from the port to a consumer’s doorstep.

Property development segment would continue to be soft. 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 and Batu Pahat approaches full completion. Meanwhile, the planned launch of Tiong Nam’s landed residential project in Kota Masai has been pushed to 2HFY18 from 2HFY17 with revised GDV of RM150m (from: RM170m).

Maintain BUY with a TP of RM1.93. We value the company using the SOP method which implies that the company is still trading below the sum of its parts, hence our BUY call. We like Tiong Nam for its market leading position in the integrated logistics industry. Meanwhile, an IPO of its logistics assets into a REIT could provide immediate rerating catalyst for the stock.

Source: MIDF Research - 8 Mar 2017