INVESTMENT HIGHLIGHTS

• 1QFY20 still in the red on a normalised basis

• Logistics division sustained its profitability with good occupancy rate of around 80% helped by commencement of warehouse and sales office in Laos.

• Property development segment remained in the red with no new project launches

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

• Maintain SELL with reduced TP of RM0.39 per share

1QFY20 still in the red on a normalised basis. Tiong Nam reported a 1QFY20 net profit of RM1.9m. Excluding exceptional items such as gain on disposal of property, plant and equipment and impairment loss on receivables, Tiong Nam recorded a normalised net loss of –RM0.2m (>- 100%yoy). The results fell short of ours and consensus’ estimates by variance of more than 10%. The negative variance was due to the weak performance from the property development segment.

Logistics division turned profitable for in 1QFY20. The logistics and warehousing segment remained in the black for the sixth consecutive quarter after recording a PBT of RM8.1m in 1QFY20, +104.8%yoy higher than 1QFY19. This led to a PBT margin of 5.6% with a commendable occupancy rate of approximately 80% for its warehouses driven by higher delivery and warehouse services demanded by its clientele. The company has also commenced operations of its warehouse and sales office in Savannakhet, Laos. Therefore, 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 still seeing red ink. The property development recorded a loss before tax of –RM1.5m in 1QFY20 compared to a PBT of RM6.4m a year ago, marking its fourth uninterrupted quarter of losses. This was mainly due to the absence of unbilled sales as of 30 June 2019 as there were no new project launches. 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.

No signs of break-even for hotel segment. Similar to the property development segment, the hotel segment also recorded losses but at a higher level of –RM4.3m. The segment has been recording losses since commencement in 3QFY19 with an occupancy rate of around 30% which is still far away from reaching its 50% occupancy rate to break even.

Reducing our earnings forecasts. While the logistics segment will be driven by new MNC clients, we continue to believe 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. Moreover, we opine that it will still take some time before the hotel and dormitory business to break even. In light of this, we are lowering our revenue contribution from the property segment and also the hotel and dormitory business. As such, our earnings forecast for FY20 and FY21 is being revised downwards to RM6.8m and RM10.7m from RM7.4m and RM11.1m respectively.

Target Price. Following the downward revision earnings and we are revising our target price to RM0.39 per share (previously RM0.41 per share). Our target price is based on sum-of-parts, consisting of: (i) its core logistics & warehousing business; (ii) its property development arm; (iii) hotel and dormitory segment and; (iii) its investment arm.

Maintain SELL. We opine that the company lacks rerating catalyst in the immediate term especially in the property segment with a remaining unsold GDV which is more than RM300m of 30 June 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. 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 such as Vietnam in which Tiong Nam has an exposure to if the trade war prolongs.

Source: MIDF Research - 27 Aug 2019