Key takeaways.

Key takeaways from Tiong Nam analyst briefing are:

1. Increased depreciation and interest expenses affecting 9MFY17 results;

2. Cross-border e-Commerce update; and

3. Warehouse REIT.

Increased depreciation and interest expenses affected 9MFY17 results

To recap, Tiong Nam reported adjusted PBT of RM55.5mn (-12.8% YoY) for 9MFY17 on the back of lower PBT margin (-2%-pts) for the logistics and warehousing division (L&W) and decline in property revenue (-23.3%). Two main factors affecting PBT margin were depreciation (+28.0%) and interest expenses (+37.6%) as the completions of new warehouses (2 in Johor and 1 in Melaka) and upward revaluation in land value in prior years required Tiong Nam to charge out higher depreciation and interest expenses. Notably, these expenses are recurring in the future.

RM10mn savings from markdown in construction cost. As far as property is concerned, the drop in revenue (-23.2% YoY) for 9MFY17 was due to completion of Tiong Nam Business Park@SiLC 7 while the construction progress of Pinetree Residence was at early stage (34.5% completion). However, the drop in revenue was partially offset by the markdown in construction cost for Tiong Nam Business Park@SiLC7, resulting in approximately RM10mn savings.

Looking forward, L&W revenue is expected to escalate with additional revenue contribution from the new warehouses. Also, the property unit would see higher billing as the construction progress of Pinetree Residence is expected to pick up following the completion of superstructure works (see Picture 1). These would provide ample buffer against the rise in depreciation and interest expenses. Note that management guided that the Pinetree Residence is expected to record 100% completion in 1H18 from estimated 49% in end-FY17.

Cross-border e-Commerce update

Following up on Tiong Nam’s cross-border e-Commerce opportunity en route from Guang Zhou--Hanoi--Laos--Bangkok--Kuala Lumpur (see report dated 30 Dec 2016), we understand that the group has set to go ahead with this venture after the positive feedback from the trial run. According to management, road freight is faster than sea freight and the shipments can always be traced using the GPS system. Also, this one-stop door-to-door solution would provide convenience to clients in terms of integration of shipment, custom clearance and last-mile delivery in one order.

Tiong Nam is expected to commence this cross-border transportation in Apr-17. It guided that the shipment would mostly come from China and the margin could be as high as 30% due to loose cargo load. Currently, the group is building a small warehouse with a capacity of 30,000 sf. in Laos for cargo consolidation in the future when the cross-border business picks up steam. In Malaysia, the group is actively negotiating with e-Commerce players such as 11th Street, Zalora and ComOne for the provision of last-mile delivery services.

Warehouse REIT

Tiong Nam is still considering a REIT proposal to unlock the value of warehouse. However, management guided that the listing of REIT would not be a part of its 2017 plans as valuation of warehouse could be a tedious process. Moreover, the group is allocating its resources towards cross-border e-Commerce venture, which is believed to be the group’s next engine of growth.

Forecast

We keep our FY17 earnings largely unchanged. However, we raise FY18 earnings by 4.9% and cut FY19 earnings by 23.8% after factoring in: 1) higher billing from Pinetree Residence as the project is expected to be handover in 1HFY18; 2) lower property sales assumptions RM107mn (versus RM123mn previously) for FY18 due to delay in launch of Kota Masai project; 3) lower property sales assumptions of RM55mn (versus RM130mn previously) for FY19 to be conservative in forecasting the sales of completed inventory.

Recommendation

We raise Tiong Nam’s SOP-valuation higher to RM1.88/share (from RM1.82 previously), based on unchanged CY17PE multiple of 13x for L&W and 8x for property. We upgrade Tiong Nam to Buy (from hold) as we look forward to the success of its cross-border e-Commerce business. Also, we are positive on unlocking asset value via REIT where shareholders may get special dividend.

Source: TA Research - 8 Mar 2017