INVESTMENT HIGHLIGHTS

• 12MFY17 met expectations

• Logistics segment was dented by start-up costs

• Property development segment fared better this time around

• Expansion plans intact, with EBIT margins set to improve

• Maintain BUY with higher TP of RM2.08

12MFY17 met expectations. Tiong Nam reported 4QFY17 core PAT of RM16.4m (+64%yoy) that contributed toward a cumulative 12MFY17 core PAT of RM59.7m (+8%yoy). The results were broadly in line with ours but fell short of consensus estimates, accounting for 96% and 88% of respective full year forecasts.

Logistics segment was dented by start-up costs, reporting a full year core PBT of RM25.3m which declined -12%yoy. Operating expenses rose +12%yoy, offsetting a +3%yoy growth in revenue as the company commissioned new warehouses in Krubong (Melaka) and Tanjung Langsat (Johor).

Property development segment fared better, registering a PBT of RM55.4m (+11%yoy). However, outlook for the segment remains cloudy as unbilled sales declined to RM132.5m as at Mar 2017 (from RM167.3m as at Dec 2016) due to a lack of new development launches. Its planned landed residential project in Kota Masai has been pushed back further due to the soft property sentiment in Johor.

Warehouse expansion plans intact. We gather from the company that the take-up rate for its new warehouses in Krubong and Tanjung Langsat have been encouraging. In fact, the company maintains an average utilisation rate of above 90%, even with the new additions. Tiong Nam’s expansion plans are intact, with a target to increase its warehouse footprint to 5.5m sq. ft. by FY18 and 7m sq. ft. by FY19. Currently, the company operates warehouses spanning 5.22m sq. ft. (3QFY17: 4.9m sq. ft.). Recently, it leased two 3rd party facilities due to keen demand for third party logistics services.

Better EBIT margins expected. We expect margins to improve in FY18 as fewer start-up costs are incurred. In addition, Tiong Nam would benefit from better economies of scale for its customised logistics solutions as it secures more clients who operate within similar industries.

Maintain BUY with higher target price of RM2.08, as we revise upward our valuation of Tiong Nam’s potential REIT to reflect current gross rental psf assumption of RM1.80 (from: RM1.60). We value the company based on its sum-of-parts, consisting of 1) its core logistics & warehousing business, 2) its property development arm and 3) the value of its warehouses if it were listed under a REIT structure. 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, giving rise to the potential of special dividends.

Source: MIDF Research - 30 May 2017