Review

• Stripping out fair value gain of RM12.0mn, disposal gain of RM1.2mn and other exceptional items, Tiong Nam Logistics Holdings’ (Tiong Nam) 1HFY24 core loss expanded to RM13.0mn versus our FY24 profit forecast of RM9.8mn. The earnings miss was due to higher-than-expected cost of operations (wage & interest expense) at the logistics and warehousing (L&W) segment.

• Tiong Nam’s 1HFY24 adjusted PBT slipped to losses of RM11.2mn despite higher revenue of RM376.3mn, up 6.0% YoY. The dismal performance was mainly due to increases in finance cost to RM29.8mn (+46.0% YoY) and staff cost to RM65.0mn (+2.6%). In terms of breakdown, the L&W segment recorded a flat revenue growth, but the adjusted PBT dropped to a loss of RM8.3mn (vs PBT of RM8.1mn in 1HFY23), indicating tremendous cost pressure. The 1HFY24 property division, however, reported higher revenue and PBT of RM28.2mn and RM15.7mn respectively on account for overwhelming demand for Kota Masai project.

• QoQ, 2QFY24 adjusted LBT expanded further to RM8.1mn (from LBT of RM3.1mn in 1QFY24). This was on the back of higher LBT from the L&W segment at RM4.6mn (+20.7%) and lower PBT from the property segment at RM4.1mn, down 42.3%.

Impact

• We downgrade our FY24/25/26 earnings projections by 2.7-46.7% to RM5.2/37.0/68.7mn respectively after inputting higher finance expense and staff cost.

Outlook

• The company has obtained the certificate of completion and compliance in August for its mega warehouse in Senai to commence operations. As such, we can expect rental income to rise from 3QFY24 onwards. Having said that, that revenue from Senai warehouse will solely be rentals as the group is not involved in the logistics operations for its client.

• The operating outlook is expected to remain challenging, no thanks to rising payroll costs and lingering worker shortage issues. Also, the supply of warehousing space is expected to outpace demand, exerting pressure on logistics and warehousing margin going forward.

Valuation

• Given the earnings downgrade, we cut Tiong Nam’s sum-of-parts valuation to RM0.70 (from RM0.76) (Figure 1). Given the lack of re-rating catalyst, we maintain sell recommendation and cease coverage on Tiong Nam.

Source: TA Research - 28 Nov 2023