Review

• Tiong Nam Logistics Holdings (Tiong Nam) achieved a profit turnaround in 2QFY20 with a core profit of RM3.2mn versus losses for the past three consecutive quarters. The cumulative core profit of RM3.0mn for 1HFY20 accounted for 26.8% and 34.8% of our full-year forecast and consensus estimates respectively. We consider this to be within expectations as 2HFY20 earnings are expected to rise further underpinned by increasing operational efficiency.

• Stripping off some impairment losses and fair value gains as well as other exceptional items of total RM0.3mn, 1HFY20 core profit declined by 65.3% YoY due to: 1) lack of unbilled sales which had been fully exhausted in 2QFY19; and 2) start-up losses from the hotel segment. However, the profit trend, where the group’s core losses narrowed sequentially from RM11.7mn in 4QFY19 to RM0.2mn in 1QFY20 and then a profit turnaround in 2QFY20 with relatively stable revenue, suggested a gradual increase in operational efficiency over this period.

• The increased operating efficiency, i.e: the rise in revenue and decline in finance cost, has lifted the logistics and warehousing’s PBT higher by 65.9% with a marginal revenue growth of 4% for 1HFY20. For this quarter, the average occupancy rate for warehouses dropped to 75% compared to 80% a quarter ago. We believe this could be due to decrease in factory outputs in Malaysia amid escalating global trade tension.

• There was a slight decrease of 3.7% QoQ in property inventories to RM188mn as the group managed to sell some properties worth RM15mn in 2QFY20. According to management, these properties were mainly 2, 3 and 4-storey shophouses in JB and Batu Pahat. Also, it is interesting to note that some buyers are foreigners.

• The hotel segment recorded a higher loss before tax of RM4.7mn in 2QFY20 (vs LBT of RM4.3mn in 1QFY20) with revenue expanded 55.5% QoQ to RM3.4mn. The rise in revenue was due to progressive ramp-up in hotel rooms. However, the hotel was still below the break-even point of 75% occupancy rate. Currently, there are 281 hotel rooms out of total 297 open for business.

Impact

• No change to our FY20-22 earnings projections.

Outlook

• We believe it is the right time for Tiong Nam’s management to revisit the idea of unlocking asset value via an establishment of REIT for all its warehouse properties. The current low interest rate environment is conducive for the setup of REIT, where the market is hungry for yield. More importantly, the REIT could help to ease the cash liquidity pressure and improve gearing levels.

• As at 2QFY20, Tiong Nam’s net gearing rose to 1.4x with a total net debt of RM969.0mn. Current ratio stood at 0.94x with substantial amount of debt (RM328mn) due within the next 12 months. Also, the group’s gross gearing ratio of 1.42x is approaching the debt covenant threshold of 1.5x, which may affect its ability to roll over its debts in the future.

Valuation

• Based on 0.5x FY20 P/NTA, we value Tiong Nam at 76sen/share (from 77sen previously). Currently, Tiong Nam is trading at 0.3x FY20 NTA, which is unjustifiable given its substantial income-generating assets. Maintain Buy.

Source: TA Research - 26 Nov 2019