INVESTMENT HIGHLIGHTS

• FY18 earnings in line with our estimates

• Logistics division remains in the red

• Revenue of property development segment flourished

• Revise earnings forecast downwards

• Maintain NEUTRAL with an adjusted TP of RM1.05 per share

FY18 earnings in line with our estimates. Tiong Nam reported 4QFY18 normalized PAT of RM9.6m (-37.3%yoy), contributing to a FY18 normalised PAT of RM45.3m (-21.5%yoy). The results met our estimates but fell short of consensus, accounting for only 98% and 93% of respective full year forecasts.

Logistics division remains in the red. The logistics and warehousing segment posted a +12.4%yoy increase in revenue for FY18 due to newly secured customers combined with the business expansion of existing ones. However, the segment reported a loss before tax of –RM1.9m in FY18 compared to a PBT of RM20.8m in FY17 mainly attributable to the +19.1%yoy increase in operating expenses amid expansion of warehousing capacity and overseas distribution centres. These ventures would only deliver meaningful earnings contributions from FY19 onwards, in our view.

Property segment stands strong. Property development revenue and PBT jumped by +23.4%yoy and +21.0%yoy respectively in FY18. We reckon that this segment was mainly supported by the construction progress for flagship projects in Nusajaya, Johor. Moving forward, Tiong Nam is confident to sell RM100m worth of unsold properties in FY19 combined with its upcoming Kota Masai township in Johor Bahru by the end of FY19 with an estimated GDV of RM150m.

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 6.5% in FY19. As such, our earnings forecast for FY19 is lowered to RM59.3m (previously RM67.3m).

Maintain NEUTRAL with an adjusted target price of RM1.05 per share. Our adjusted TP of RM1.05 (previously RM1.23 per share) 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 - 30 May 2018