KEY INVESTMENT HIGHLIGHTS

• Quarterly improvement, yet below pre-pandemic level

• The logistics and warehousing segment has recorded growth for PBT

• Property segment revenue decline circa -96%yoy

• No signs of break-even for hotel segment

• Expected completion for shares issuance by 4QCY20

• Cut our top line estimate for FY21E/22F BY -4.8%/-1.4%

• Maintain SELL with a revised TP of RM0.56 per share

Quarterly improvement, yet below pre-pandemic level. In 2QFY21, Tiong Nam Logistic Holdings Berhad (Tiong Nam) reported a profit after tax of RM3.9m (+167%qoq and +124yoy). Despite the improvement in PAT and higher revenue on quarterly basis at RM149.0m (+21%qoq) the revenue was still below from the same period last year. Revenue was down -4%yoy and core profit is recorded to the tune of RM2.2m (+141qoq and -31%yoy). Cumulatively, for 6M21, the group revenue is recorded at RM272.0m (-11%yoy) with earnings stood at – RM1.9m (-144%yoy).

Logistics division is the only growing segment. For 1HFY21, the logistics and warehousing segment recorded growth in profit before tax at RM17.2m or +17%yoy. This was on the back of higher revenue at RM146.8 (+22%qoq and +7%yoy) attributable to new total logistics customers as well as business expansion from Tiong Nam existing customer base. The resiliency of this segment, with its growing profitability cushioned the soft property and hotel division. We opine that the uplift in sales is underpinned by its MNC customers - which helped sustain the occupancy rate for its warehouses and business volumes for its logistics.

Property segment decimated. The property development segment recorded a negative PBT of –RM3.3m in 2QFY21, (+40%qoq and - 298%yoy). 6M21 top line was recorded at only RM0.9m in comparison of the same period last year of RM21.2m. This represented a revenue decline of circa -96%yoy for the segment. Previously, management noted that its upcoming Kota Masai township project with an estimated GDV of RM150m is targeted to be launched in 2HFY21. However, we reiterate our view that there could be further delay given the challenging property market in Johor and unabated pandemic situation in Malaysia. 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 its target markets, 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 –RM10.2m for 6M21 (-14%yoy). 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.).

Timeline for completion of share issuance. Based on a filing yesterday, the group has disclosed that the expected timeline of for the proposed shares issuance to be completed by 4QCY20. To reiterate, 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.

Earnings estimates. As 2QFY21 came in below our expectation, we cut our top line estimate for FY21E/22F to RM565.3/RM597.5 or, -4.8%/-1.4% revision to account for lower revenue expectation from property and hotel segment. This impact our earnings estimate for FY21E/FY22F from RM10.4m/11.2m to RM1.5m/RM2.3m as the quarter result highlight the challenging operating environment for the company amidst the pandemic. However, we remain upbeat on the long term potential of Tiong Nam as it is one of the biggest logistic players in Malaysia with notable regional presence in comparison to its peers.

Target price. We are revising our target price at RM0.56 per share (from RM0.31 previously) as Tiong Nam is seeking approval for its non-interested 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 - 24 Nov 2020