KEY INVESTMENT HIGHLIGHTS

• Across-the-board decline in both top line and earnings
• Property and hotel segment drag the company financial performance to negative territory.
• Logistics division dwindling earnings is a red flag.
• FY21 will be challenging year for Tiong Nam’s property segment.
• No signs of break-even for hotel segment.
• Maintain SELL with a revised TP of RM0.31 per share

1QFY21 core PATAMI underperformed. Tiong Nam recorded a 1QFY21 core loss of -RM5.39m (-<100%) against our expectation of RM2.68m. Overall, the group saw across-the-board decline in both top line and earnings. The poor earnings can be attributed to the Movement Control Orders (MCO) as it caused the property and hotel segment to drag their financial performance to negative territory, despite a profitable logistic division. This was a second quarterly loss since 4QFY20 after a profitable 3QFY20 and 2QFY20.

Logistics division earnings dwindled in 2QFY20. The logistics and warehousing segment remained in the black as it recorded a positive PBT of RM2.84m, lower than previous results at -73.8%qoq and - 64.7%yoy. Despite the resilience, earnings for its logistics division dwindled during the quarter which we opine is a red flag, given that the segment is the “rain maker” for the group. This especially so as the segment has had to offset the persistent weakness its property and hotel segment. We opine that the segment’s resilience was underpinned by its MNC customers which helped to sustain the occupancy rate for its warehouses by >70.0%. However, the segment was further dragged by the intense competition in the space which further exacerbated the already razor thin margins from the segment.

Property segment recorded negative earnings. The property development segment recorded a negative PBT of -RM5.42m in 1QFY21, -<100% on a sequential quarter and year basis on the back of almost 1x decline in revenue. Management noted that its upcoming Kota Masai township project with an estimated GDV of RM150m is targeted to be launched in 2HFY21. However, we opine that there could be further delay given the challenging property market in Johor. Furthermore, most of Tiong Nam’s property development segment consists of industrial and commercial property, i.e. Tiong Nam Business Park. With the Covid-19 pandemic impacting local businesses with overseas exposure, we believe that businesses will defer big ticket purchases and prioritizes more on cash conservation. Hence, we reaffirm our view that it will still be challenging year for Tiong Nam’s property segment.

No signs of break-even for hotel segment. The hotel and dormitory segment recorded a loss before tax of –RM4.72m for 1QFY21 compared to just –RM5.9m last quarter. This segment has been recording losses since commencement in 3Q19 with an occupancy rate of around 25-30% which is still far away from reaching its 50% occupancy rate to break even (est.).

Earnings estimates. As 1QFY21 came in below our expectation, we slashed our earnings estimate for FY21E/FY22F from RM2.4m/2.5m to RM1.75m/1.77m as the quarter result highlight the challenging operating environment for the company amidst the pandemic.

Target price. We are revising our target price lower to RM0.31 per share (previously RM0.37). The adjustment was due to a lower target EPS estimates for FY21 and FY22 as reflect the challenging environment due to the covid-19 outbreak. 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 as of 30 December 2019. We believe that Tiong Nam will face difficulty in launching the Kota Masai project in time by 2HFY21 given that the majority of its property projects are located in Johor. Recall that in CY19, Johor saw a 10.4% decline in office occupancy rates, substantially higher than Penang that faced a 1.4% drop. Meanwhile, Johor accounted for most of the property overhang in Malaysia with 18,517 units as at 3QCY19 followed by Selangor and Kuala Lumpur with 7,226 and 5,170 units respectively.

Tiong Nam has a sales office in Shenzhen, China and Hanoi along with distribution centres spread out in ASEAN such as Singapore, Thailand and Myanmar. Despite many factories in China being granted permission to resume operations, many manufacturers are not immediately resuming full production either due to manpower shortage, in response to or as a precaution to ensure quarantine measures for returning workers. This will in turn cause delays in delivery of goods to outside of China which include ASEAN countries.

As such we maintain our SELL call on Tiong Nam. A rerating catalyst would be: (i) a faster-than-expected recovery from Covid-19; and (ii) the pickup in Johor’s property market.

Source: MIDF Research - 25 Aug 2020