INVESTMENT HIGHLIGHTS

• Property development segment to remain muted due to stagnant property market in Johor

• Masai and Pasir Gudang district recorded the lowest transaction volume, increasing possibility of Kota Masai project to be delayed beyond 2HFY20

• Growth in logistics unlikely to propel group PBT levels seen in FY14 to FY17

• Maintain SELL with an unchanged TP of RM0.41 per share

Declining contribution from property development segment. The contribution of the property development to Tiong Nam Logistics Holdings Berhad’s (Tiong Nam) PBT was more than 45% from FY14 to FY18. However, the property development segment performed poorly in FY19, dragging the PBT to RM0.21m, and resulting in the PBT margin for the segment to decline substantially 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.

Callenging outlook in Johor property market. In 1QCY19, more than 51,000 units of properties were unsold in Johor with an estimated value of RM36.8m. Johor Bahru, the district in which Tiong Nam’s industrial parks are mostly located in, recorded the highest number of unsold properties consisting of 10,892 residential units, 30,025 serviced apartment units, 1,685 shop lot units and 598 industrial building units. We believe that Tiong Nam would face tough competition given the expectation of a stagnant property market in Johor. This is due to the fact that other property developers will also have to clear their unsold properties. To give context, Tiong Nam’s total gross development value (GDV) of more than RM400m.

Tiong Nam only left with Kota Masai project in the pipeline. With no new property development projects in the pipeline except Kota Masai with a GDV of RM150m, earnings visibility is clouded. According to the National Property Information Centre (NAPIC) and EdgeProp.my, Masai and Pasir Gudang are areas in Johor with low transaction volumes; not more than 1,500 transactions annually in 2018, suggesting low demand for these areas and its surrounding vicinity. The low number of transaction volumes in both said areas could possibly shelve the launch of Tiong Nam’s Kota Masai project beyond 2HFY20 as it is located between Masai and Pasir Gudang. Moreover, the location of Kota Masai which is approximately within 15km from Sungai Kim Kim might be affected by the negative sentiment over environmental pollution there.

Logistics and warehousing segment insufficient to fill in the gap by property development segment. The logistics and warehousing segment 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 with a commendable occupancy rate of 80% for its warehouses. Room for margin expansion exists for the segment due to the addition of new MNC customers and expansion of existing ones which will increase the occupancy rate to around 90% in FY20. Nevertheless, despite our revenue growth assumption of 3.0% for logistics and warehousing segment in FY20 following the increased client base, we believe it will not be able to boost Tiong Nam’s total PBT to the levels seen in FY14 to FY18.

Earnings forecast. We are making no changes to our FY20 and FY21 forecasts at this juncture.

Maintain SELL. We opine that the company lacks re-rating catalyst in the immediate term especially in the property segment with a remaining >RM400m of unsold GDV as of 31 March 2019. We believe that Tiong Nam will face difficulty in clearing its unsold inventory given that the majority of its property projects are located in Johor. Moreover its hotel and dormitory segment is still expected to be in the red for FY20. Recall that Johor has the most unsold properties in Malaysia over the last two years. Regarding its plan to list its logistics assets into a REIT, maximum yield threshold acceptable by Tiong Nam to list its warehouse assets into a REIT is 6.0% compared other M-REITs which can fetch a yield around 7.0% (such as CapitaLand Malaysia Mall Trust (CMMT) and Amanah Raya REIT)). All in we maintain our SELL call on Tiong Nam with an unchanged target price of RM0.41 per share based on our sum-ofthe-parts valuation. A re-rating 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 if the trade war prolongs.

Source: MIDF Research - 10 Jul 2019