Tiong Nam’ sees no capex tightening, cost cutting

TheEdge Mon, Mar 18, 2019 09:46am - 5 years View Original


Tiong Nam Logistics Holdings Bhd
(March 15, 63 sen)
Maintain hold with a target price (TP) of 68 sen:
Tiong Nam recorded its first quarterly core losses since we initiated coverage in 2016. The third quarter of financial year 2019 (3QFY19) core profit, after removing fair value (FV) gain on investment properties (RM5.4 million), FV loss on quoted investments (RM2.3 million), disposal gains (RM400,000), forex loss (RM200,000), and other exceptional items (EIs) , slipped into a loss of RM2.6 million in 3QFY19. This raises our concerns over the group’s ability to meet its short-term financial obligations.

 
On the surface, the sharp decline in adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) (adjusting for EIs) and rise in inventory, comprising mainly unsold properties, continued to drain company’s free cash flow (operating cash flow — capital expenditure [capex]). The drop in interest coverage ratio to 1.4 times for the nine months of financial year 2019 (9MFY19) and a quick ratio of less than 1 time raised concerns about the company’s ability to meet its short-term obligations without the need to put its unsold property inventories under fire sale. The gross and net gearing ratios, which measure a company’s financial risks, expanded to 1.26-1.27 times signalling the company’s poor financial standings.

However, in the recent meeting with management after the release of 3QFY19 results, they indicated that banks are still comfortable to lend to the company because of its abundant income-generating fixed assets. Note that the bulk (72%) of Tiong Nam’s borrowings were secured by various charges and pledges on the group’s fixed assets. The company will still be able to draw financing from banks unless one of the following covenants is breached: 1) Gross gearing ratio of the group shall not exceed 1.7:1; 2) To maintain the group’s tangible net worth of not less than RM250 million; 3) The managing director shall maintain more than 40% of direct and indirect shareholdings in the company.

In our forecast, we expect FY21-21 earnings to recover underpinned by increasing contribution from logistics and warehousing operations. FY20-21 gross gearing and the group’s tangible net worth are expected to improve to 0.94-0.89 times and RM741 million to RM768 million respectively. Also, considering that the founder, Ong Yoong Nyock, has upped his stake to cross the 50% threshold; it is irrational for him to pare down its stake to below 50%. In view of the above, we do not see a threat that will lead to a breach of covenants. To break it, we will need additional borrowings of roughly RM480 million to have the gross gearing ratio increase to 1.7 times.

According to management, the group is neither tightening its future capex nor implementing cost-cutting measures nor putting its unsold properties under fire sale. Instead, it will try to grow the top line by leveraging on those unsold properties. It will lease those unsold properties, mainly Pinetree Residence (in Puteri Harbour, Johor), to online travel agents to prop up earnings. How-

ever, this move could potentially put a dent on its hotel’s occupancy rates.

The hotel was opened in November 2018 and the group has recorded some start-up losses of RM2.3 million in 3QFY19. This five-star hotel, which is operated by Fraser Place, is seated on the same piece of land with Pinetree Residence. It has a room capacity of 300 units and currently opens only 100 units for daily sales. The average room rate ranges from RM291 to RM307 per night as quoted by various online travel agencies. Comparing this with Pinetree Residence within Pinetree Marina Resort, the weekend room rate for the deluxe one-bedroom apartment (635sf) is only RM241 and a premier two-bedroom apartment (1,216sf) is only asking for RM349 per night. Given the cheaper price, we believe Pinetree Residence would continue to cannibalise its hotel occupancy, which requires approximately 70% occupancy rate to break even.

We maintain our FY19-21 earnings projections. However, we reduce our FY20-21 dividend assumptions to 0-2 sen, from 2-4 sen previously.

We are not overly worried about Tiong Nam’s deteriorating financial standings now after learning that the company still has ample debt capacity. Having said that, we still could not find any silver linings in the near future, which plagued by exhausted unbilled sales. Also, we believe the company may discard dividend payments for FY19-20 amid poor earnings visibility.

Tiong Nam’s stock price plummeted more than 10% after the release of 3QFY19 results. We believe the market has factored in the earnings risks or possibly some financial risks. At the last close of 63 sen, the stock valuation is attractive as opposed to Tiong Nam’s total net tangible assets of more than RM700 million, which is equivalent to RM1.56 per share. That being said, there is a lack of strong conviction for “buy” due to poor earnings visibility. — TA Securities, March 15

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