INVESTMENT HIGHLIGHTS

• 9MFY18 fell short of estimates

• Logistics division remains in the red

• Revenue of property development segment flourished

• Revise earnings forecast downwards

• Maintain NEUTRAL with an adjusted TP of RM1.23 per share

9MFY18 fell short of estimates. Tiong Nam reported 3QFY18 normalized PAT of RM12.9m (+10.6%yoy). This contributed to a 9MFY18 normalised PAT of RM35.5m (-22.5%yoy,) which missed both ours and consensus estimates, accounting for only 68% of our respective full year forecasts. The shortfall was due to a higher effective tax rate of 34% in 3QFY18 due to certain expenses which were not tax deductible and operating expenses which rose by +21.6%yoy.

Logistics division remains in the red. The logistics & warehousing revenue rose by +13.4%yoy in 3QFY18 due to newly secured customers combined with the business expansion of existing ones. However, the segment registered a loss before tax of –RM0.01m compared to the PBT of RM5.5m recorded in the same quarter of the preceding year attributable to the +22.2%yoy increase in operating expenses. We reckon that the bulk of operating expenses is related to start-up costs from the cross-border trucking business and new overseas distribution centre. These ventures would only deliver meaningful earnings contributions from FY19 onwards, in our view. Overall, we expect expenses to remain heightened, with a propensity to rise further, with RM100m in capex budgeted for FY18.

Property segment flourished. The operating expenses of Tiong Nam’s property segment in 3QFY18 ballooned up to RM22.0m from RM0.9m in 3QFY17. Nonetheless, this was mitigated by the ongoing construction of projects in Nusajaya which includes the Silc7 and the Pine tree which contributed revenue of RM41.1m (+77.8%yoy). Moving forward, Tiong Nam is confident to sell RM100m worth of unsold properties in FY19.

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 7.5% to 7.0% in FY18. As such, our earnings forecast for FY18 and FY19 is lowered to RM46.0m (previously RM52.1m) and RM67.3m (previously RM71.0m), respectively.

Maintain NEUTRAL with an adjusted target price of RM1.23 per share. Our adjusted TP of RM1.23 (previously 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. We reckon that although Tiong Nam is in a market leading position in the integrated logistics industry, the operating expenses incurred for its expansions are compressing its margins. A rerating catalyst would be the IPO of its logistics assets injected into a REIT structure could provide immediate rerating catalyst for the stock, giving rise to the potential of special dividends.

Source: MIDF Research - 27 Feb 2018