KEY INVESTMENT HIGHLIGHTS

• Bursa has approved shares issuances to a major shareholder

• The fund raised is to partially finance CAPEX in Johor with negotiations expected to complete by year end

• The proposed exercise is timely as the company needs additional storage capacity for its business operations

• Huge commitment to service its existing debt

• FY21-22F earnings maintained for now

• Maintain SELL with an unchanged TP of RM0.31 per share

Approval for share issuance. Based on a filing yesterday, Bursa Malaysia has approved Tiong Nam Logistics Holdings Berhad’s (Tiong Nam) proposed issuance of shares to Ong Yoong Nyock (OYN). OYN is the Managing Director and a major shareholder of Tiong Nam. The approved shares issuance is of 67.05m at an issue price of RM0.4354. Currently, OYN holds circa 20.3% of the company and upon completion, the proposed shares issuances will result in OYN holding 30.7% of the group.

Fund raised is for CAPEX. Based on the issue price of the shares at RM0.4354, the expected fund raised will translate to approximately RM29.2m. According to Tiong Nam, the fund is earmarked for CAPEX purposes. Specifically, to partially finance the purchase of lands and warehouses in Johor for capacity expansion. As of now, subject to closure of negotiations, the estimated cost of the said purchase is circa RM65m, with the remaining balance to be funded via bank borrowings or internally generated funds. Negotiations are expected to be completed by the end of the year.

Current capacity of Tiong Nam. Recall that, Tiong Nam logistics services are supported by a fleet of circa 3,600 transportation vehicles (prime movers, box and refrigerated trucks, low-loader, delivery vans and others). The group logistics services consist of 83 regional warehouses and distribution centers across ASEAN countries with total capacity of 5.4m sqft, of which the average utilisation rate is circa 80%. Including the above purchase, Tiong Nam is expected to add more than 10% capacity to its warehouse segment to reach 6.0m sqft marks by FY22-23.

Additional capacity needed. Based on its recent financial result, Tiong Nam’s cash and equivalents stood at ~RM10.50m with total borrowings circa RM1.0b. In additions, the group interest expense as of FY20 was at RM49.30m (average cost of debt circa 4.8%). This share issuance is timely as the company needs additional storage capacity for its business operations yet lacks the balance sheet strength to finance the expansion. Current 80% average utilisation rate of its warehouse can be considered high as the remaining ~20% acts as buffer for seasonal peak periods.

Earnings impact. We opine that it is too early to quantify the expected capex investment has on Tiong Nam’s bottomline. Furthermore, our channel checks reveal that it will take a while (an estimated eight (8) years) for a warehouse of such size and investment to break even. Hence, while the new warehouses will undeniably assist in lifting earnings; we do not expect a speedy contribution coming from the investment any time soon especially with the expected high interest expense to be incurred in the future should the investment go through. Noteworthy to highlight, Tiong Nam’s interest expenses for FY19 and FY20 were RM47.21m and RM49.30m, or ~83% or 81% of its operating profit. This demonstrates a huge financial commitment to service its existing debt, not to mention additional debt obligation, if materializes. Therefore, we are maintaining our FY21-22F earnings estimates at this juncture.

Target price. We are maintaining our target price at RM0.31 per share as Tiong Nam is seeking approval for its noninterested shareholders of the subscriptions shares to OYN in accordance with Bursa Listing Requirements.

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.

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 - 13 Nov 2020