INVESTMENT HIGHLIGHTS

• 1HFY18 fell short of estimates

• Logistics division incurred a loss before tax

• Start-up costs incurred for new ventures dragged earnings

• Property division did well

• Maintain NEUTRAL with reduced TP of RM1.43

1HFY18 fell short of estimates. Tiong Nam reported 2QFY18 core PAT of RM16.6m (+10.6%yoy), which contributed to a 1HFY18 core PAT of RM22.6m (-22.5%yoy,) which missed both ours and consensus estimates, accounting for only 34% and 43% of respective full year forecasts. The large shortfall was due to operating expenses which rose by more than half at 54.3%yoy in 1HFY18 with increases in staff headcount, warehouse footprint and vehicle count. Besides that, start-up costs related to new ventures could have also dampened earnings.

Logistics division incurred a loss before tax. The logistics & warehousing revenue rose +19.4%yoy due to newly secured customers combined with the business expansion of existing ones. However, the segment registered a loss before tax of –RM3.9m compared to the PBT of RM4.2m recorded in the same quarter of the preceding year attributable to the +29.3%yoy increase in operating expenses.

Heightened expenses by new ventures. We believe the bulk in operating expenses is related to the start-up costs on its new ventures of its last-mile and cross-border trucking business. These ventures would only delivery meaningful earnings contributions from FY19 onwards, in our view. Among its new ventures, Tiong Nam recently launched its lastmile delivery business, “Instant” in April 2017. Meanwhile, its crossborder trucking business (Malaysia-Thailand-Laos/Myanmar-VietnamChina) is still in its infancy. Overall, we expect expenses to remain heightened, with a propensity to rise further, with RM100m in capex budgeted for FY18.

Property division did well. Tiong Nam’s property division, on the other hand, performed well, with its PBT increasing by +101.0%yoy to RM25.0m due to progress billings from its Pine Tree Residence development in Puteri Harbour, Johor.

Reducing our earnings forecasts. With revenue only expected to compensate for the rising costs gradually over the coming quarters, we raise our assumptions for operating expenses and financing costs which led to a reduction in our EBIT margin forecast for the logistics and warehousing division from 9.0% to 7.5%. As such, our earnings forecast for FY18 and FY19 is lowered to RM52.1m and RM71.0m, respectively.

Maintain NEUTRAL with a reduced target price of RM1.43. While we like Tiong Nam’s long-term prospects as a market leader in logistics and warehousing, we believe the company could face earnings pressure in the shortmedium term as a result of rapid expansion and the start-up of new businesses. Our TP of RM1.47 is 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.

Source: MIDF Research - 28 Nov 2017