Tiong Nam’s logistics unit seen to be driven by new MNC clients

TheEdge Wed, Aug 28, 2019 10:47am - 4 years View Original


Tiong Nam Logistics Holdings Bhd
(Aug 27, 49.5 sen)
Maintain sell with a lower target price (TP) of 39 sen:
Tiong Nam Logistics Holdings Bhd reported a first quarter of financial year 2020 (1QFY20) net profit of RM1.9 million. Excluding exceptional items such as gain on disposal of property, plant and equipment and impairment loss on receivables, Tiong Nam recorded a normalised net loss of RM200,000 (down more than 100% year-on-year [y-o-y]). The results fell short of our and consensus estimates by variance of more than 10%. The negative variance was due to the weak performance from the property development segment.

 
The logistics and warehousing segment remained in the black for the sixth consecutive quarter after recording a profit before tax (PBT) of RM8.1 million in 1QFY20, 104.8% y-o-y higher than 1QFY19. This led to a PBT margin of 5.6% with a commendable occupancy rate of approximately 80% for its warehouses driven by higher delivery and warehouse services demanded by its clientele. The company has also commenced operations of its warehouse and sales office in Savannakhet, Laos. Therefore, we believe that there is room for margin expansion for the segment due to the addition of new multinational corporation (MNC) customers and expansion of existing ones which will increase it to around 90% in financial year ending 2020 (FY20).

The property development recorded a loss before tax of RM1.5 million in 1QFY20 compared to a PBT of RM6.4 million a year ago, marking its fourth uninterrupted quarter of losses. This was mainly due to the absence of unbilled sales as of June 30, 2019 as there were no new project launches. The management noted that its upcoming Kota Masai township project with an estimated gross development value (GDV) of RM150 million will be launched in the second half of FY20 (2HFY20). However, we opine that there could be a further delay given the challenging property market in Johor.

Similar to the property development segment, the hotel segment also recorded losses but at a higher level of RM4.3 million. The segment has been recording losses since commencement in 3QFY19 with an occupancy rate of around 30% which is still far away from reaching its 50% occupancy rate to break even.

While the logistics segment will be driven by new MNC clients, we continue to believe that this would be weighed down by the sluggish performance of the property segment with no new projects in the pipeline except Kota Masai, providing limited earnings visibility. Moreover, we opine that it will still take some time before the hotel and dormitory business to break even. In light of this, we are lowering our revenue contribution from the property segment and also the hotel and dormitory business. As such, our earnings forecast for FY20 and FY21 is being revised downwards to RM6.8 million and RM10.7 million from RM7.4 million and RM11.1 million respectively.

Following the downward revision earnings and we are revising our TP to 39 sen per share (previously 41 sen per share). Our TP is based on a sum-of-parts, consisting of: i) its core logistics and warehousing business; ii) its property development arm; iii) hotel and dormitory segment; and iii) its investment arm.

We opine that the company lacks rerating catalyst in the immediate term, especially for the property segment with a remaining unsold GDV which was more than RM300 million as of June 30, 2019. We believe that Tiong Nam will face difficulty in clearing its unsold inventory given that the majority of its property projects are located in Johor. Moreover, its hotel and dormitory segment is still expected to be in the red for FY20. Recall that Johor has the most unsold properties in Malaysia over the last two years. A rerating catalyst would be: 1) the inclusion of Tiong Nam into the Securities Commission Malaysia’s list of syariah-compliant securities; and 2) the relocation of companies from China to Southeast Asia such as Vietnam in which Tiong Nam has an exposure to if the trade war prolongs. — MIDF Research, Aug 27

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