Investment Highlights

• Logistics segment dampened by start-up costs

• Property Development segment progressing well

• Aspires to regain back Shariah-compliant status

• Maintain NEUTRAL with unchanged TP of RM1.43 per share

Logistics and warehousing segment dampened by start-up costs. Tiong Nam reiterated that its loss before tax of –RM3.9m in 2QFY18 was mainly due to start-up costs related to its warehouse expansion. The company has aggressively expanded its warehousing space over the span of nine months (Jan 2017 to Sept 2017) by +13% or from 0.6msqft to 5.5msqft. New warehouses typically require a three to nine month gestation period.

Contribution from new ventures still small. The management also noted that they have acquired new customers from the electronics and automotive industry for the cross border trucking business. The routes for these new customers stretch from Singapore to Thailand. Nonetheless, contributions from the new customers remain relatively insignificant as services only commenced in October this year.

Property division progressing well. Tiong Nam’s property division on the other hand, performed well with near term earnings to be buoyed through the recognition of unbilled sales of RM80.4m as at end of 2QFY18. On the flipside, the launch of Tiong Nam’s landed residential project in Kota Masai could face further delays as the company intends to focus on selling its unsold properties from key projects such as Tiong Nam Business park at SiLC 5 and Kempas 2, amongst others.

Regaining its Shariah-compliant status is a priority. On 24 November 2017, Tiong Nam’s Shariah-compliant status was removed as its conventional debt over total assets breached the 33% threshold. The removal prompted a brief selloff on the same day which caused the company’s share price to fall by as much as -5.8% to RM1.30, the lowest since July 2016. Henceforth, Tiong Nam is focused on regaining its Shariah-compliant status in the next update.

Maintain NEUTRAL with an unchanged 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 combined with its exclusion from the list of Shariah-compliant securities. Our TP of RM1.43 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 - 15 Dec 2017