INVESTMENT HIGHLIGHTS

• 9MFY19 normalised PAT fell short of estimates in view of lower capitalisation of property development projects

• Nonetheless, the logistics and warehousing segment remained profitable due to new clients and expansion of current ones

• E-commerce delivery segment and cross border trucking yet to deliver meaningful contributions amid tight competition

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

• Downgrade to SELL with a reduced TP of RM0.58 per share

9MFY19 earnings fell short of estimates. Tiong Nam Logistics Holdings Bhd (Tiong Nam) reported 3QFY19 normalised PAT of RM3.3m (-74.4%yoy), which contributed to a 9MFY19 normalised PAT of RM11.8m (-67.0%yoy). This was below ours and consensus’ FY19 earnings estimates by a variance of more than 10%. The deviation was mainly due to lower capitalisation of property development projects despite the incurrence of higher finance costs.

Logistics and warehousing profitable for third straight quarter. Tiong Nam’s logistics and warehousing segment recorded a PBT of RM18.1m in 9MFY19 compared to the -RM2.5m loss before tax in 9MFY18. Moreover, EBITDA margins were +6ppts higher at 14% compared to the same period last year. The improvement came from the addition of new MNC customers and expansion of existing ones which could sustain the occupancy rate at its warehouses at approximately 80% for FY19 and subsequently 90% in FY20.

Longer gestation period for the oversea distribution centres. Meanwhile, Tiong Nam’s overseas distribution centres have yet to deliver meaningful earnings contribution as the company is focusing on gaining reputation with certain customers before expanding service offerings to others. Likewise, its e-commerce delivery segment, ‘Instant’ will still be loss-making in FY19 amidst competition from new entries in the industry. Tiong Nam cited that it will maintain ‘Instant’ while waiting for the market to consolidate before making any huge expansions. As such finance costs will continue to remain elevated before breaking even as indicated by the net gearing levels which have increased to 1.24x as of 31 December 2018 from 1.09x during the same period last year.

Source: MIDF Research - 19 Feb 2019