INVESTMENT HIGHLIGHTS

• FY19 earnings took a steep down turn

• Logistics division turned profitable with good occupancy rate of 80%.

• Property development segment slumped into the red as majority of projects reached completion

• Revise earnings forecast downwards to reflect lower contribution from property development

• Maintain SELL with reduced TP of RM0.41 per share

FY19 earnings below our estimates. Tiong Nam reported 4QFY19 normalized loss after tax of RM11.6m (-213.5%yoy), contributing to a FY19 normalised loss after tax of RM0.3m (-100.6%yoy). The results fell short of ours and consensus’ estimates by variance of more than 10%. The negative variance was partly due to higher tax expenses as certain expenses were non-deductible combined with a higher Real Property Gain Tax.

Logistics division turned profitable for FY19. The logistics and warehousing returned to the black after recording a PBT of RM22.5m in FY19 compared to the loss before tax of RM1.7m a year ago. This led to a PBT margin of 4.2% with a commendable occupancy rate of 80% for its warehouses. We believe that there is room for margin expansion for the segment due to the addition of new MNC customers and expansion of existing ones which will increase it to around 90% in FY20.

Property segment slumped into the red. The property development segment performed poorly in FY19, posting a nearly -100%yoy decline in PBT to RM0.21m, dragging the PBT margin down to 0.4% compared to 46.0% a year ago. This was mainly due to the absence of unbilled sales as of 31 March 2019 (vs RM2.2m during the same period last year) following the completion of the majority of its property development projects. Management noted that its upcoming Kota Masai township project with an estimated GDV of RM150m will be launched in 2HFY20. However, we opine that there could be a further delay given the challenging property market in Johor.

Slashing our earnings forecasts. While the logistics segment will be driven by new MNC clients, we reckon that this would be weighed down by the sluggish performance of the property segment with no new projects in the pipeline except Kota Masai, providing limited earnings visibility. In light of this, we are lowering our revenue contribution from the property segment and a higher tax expense which leads to a reduction in our FY20 PAT margin forecast to 1.2% from approximately 2.9% previously. As such, our earnings forecast for FY20 is being revised downwards to RM7.4m while we introduce FY21 earnings forecast.

Source: MIDF Research - 3 Jun 2019