INVESTMENT HIGHLIGHTS

• Warehouse capacity expansion scaled back to 5.9m sqft (previously 7.0m sqft) to maintain occupancy rate near 80%

• Overseas distribution centres and e-commerce delivery segments yet to deliver meaningful earnings

• Lack of new property developments in the pipeline, with the exception of Kota Masai township, to inhibit earnings growth

• Maintain NEUTRAL with a reduced TP of RM0.92 per share

Scaling back on warehouse expansion plans. Initially, Tiong Nam Logistics Holdings Bhd (Tiong Nam) planned to expand its warehouse capacity to 7.0m sqft from the current 5.5m sqft by FY20. However, the management noted that only an additional 0.4m sqft of capacity will be added by FY20, bringing the total capacity to approximately 5.9m sqft. The capacity expansion will be carried out at Laos (0.03m sqft), Kulim (0.10m sqft) and Seelong (0.30m sqft). The scale back on warehouse expansion plans would enable Tiong Nam to focus on attaining larger clientele to optimise the existing warehouse capacity. Moreover, the occupancy rate for Tiong Nam’s warehouses is expected to hit nearly 80% for FY19 due to the addition of new MNC customers involved in the FMCG sector.

No meaningful contribution from its new ventures. Meanwhile, Tiong Nam’s overseas distribution centres has yet to deliver meaningful earnings contribution as the company is focusing on gaining reputation with certain customers before expanding service offerings to others. Currently, countries like Myanmar are supported by a large local telecommunication company while Vietnam has not seen much traction in terms of volume. Likewise, its e-commerce delivery segment, ‘Instant’ will still be loss-making in FY19. Tiong Nam cited that it will maintain Instant while waiting for the market to consolidate before making any huge expansions.

Contribution from the property segment to trend lower. The PBT of the property segment in 2QFY19 is expected to be weaker than 1QFY19 due to lower unbilled sales and the completion of the Pinetree Marina Resorts. To recall, the PBT of the property development segment declined by -27.9%yoy to RM6.4m in 1QFY19. Moving forward, the new project that Tiong Nam is left with is the Kota Masai township which is expected to be launched towards the end of FY19/1QCY19 with an estimated GDV of RM150m. Overall, Tiong Nam is targeting to sell RM100m worth of unsold properties in FY19.

Downward revision in earnings forecasts. While the logistics segment will be driven by new MNC clients, we reckon that this would be weighed down by: (i) the sluggish performance of the property segment with no new projects in sight except Kota Masai; and (ii) the overseas distribution centres and e-commerce delivery segment which is yet to deliver meaningful earnings contribution. Therefore, we are lowering our revenue contribution from the property segment which leads to a reduction in our FY19 PAT margin forecast to below 15.0% from above 20.0% previously for the segment. As such, our earnings forecast for FY19 and FY20 are being revised downwards by - 19.9% and -19.6% to RM33.0m and RM40.5m respectively.

Maintain NEUTRAL with a reduced target price of RM0.92 per share. Our adjusted TP of RM0.92 (previously RM1.02 per share) post-earnings revision is based on its sum-of-parts, consisting of: (i) its core logistics & warehousing business (ii) Its property development arm and; (iii) the investment arm. A rerating catalyst would be: (i) the inclusion of Tiong Nam into the Securities Commission’s list of Shariah-compliant securities; and (ii) the relocation of companies from China to South East Asia to circumvent the effects of the trade war.

Source: MIDF Research - 8 Nov 2018