This article first appeared in The Edge Financial Daily on August 20, 2019 - August 26, 2019

Tiong Nam Logistics Holdings Bhd
(Aug 19, 52 sen)

Maintain sell with an unchanged target price (TP) of 33 sen: We gathered that demand for logistics and warehousing services remains good, especially in the Klang Valley. Some of Tiong Nam Logistics Holdings Bhd’s existing customers from the food and beverage industry have taken up more storage space to cater for their increasing needs. As land is limited for warehouse expansion, Tiong Nam will focus on maximising its existing warehouse space. 

Recently, the group installed a satellite-racking system in one of their warehouses, increasing its floor utilisation to 100%, compared with 40% for a conventional racking system. The group also aims to increase its clientele base with more specialised logistics and warehousing requirements, such as expanding cold-room warehouse facilities. Currently, its average warehouse utilisation is at a healthy 80%.

To mitigate the property market’s slowdown, the group marketed 100 of its unsold residential units for rental through online travel agents, generating a recurring revenue of about RM200,000 to RM300,000 per month, which should partially cover the segment’s depreciation and finance costs. That said, we expect Tiong Nam’s property earnings to remain lacklustre for financial year 2020 estimated  (FY20E) given no unbilled sales, coupled with no new property launches.

Although its hotel occupancy has improved to 30% compared with 20% in February 2019, the segment is expected to remain in the red in FY20E. We gathered at least a 50% occupancy is needed for the hotel business to break even. Meanwhile, its last-mile delivery, that is instant, and cross-border services are expected to continue incurring losses given the lack of economies of scale and high operating costs.

Its net gearing remained high at 1.3 times as at March 2019, and the plan to list its warehouses through a real estate investment trust has been deferred due to a weak property market. However, the current net gearing should be manageable given its positive operating cash flow and low average financing cost of about 4.7% per annum in FY19E. A minimal capital expenditure is expected at about RM20 million in FY20E, mainly for maintenance purposes.

Tiong Nam’s first quarter of FY20 results are expected to be announced on Aug 27. We expect better quarter-on-quarter earnings supported by improved logistics and warehousing revenue, but partially offset by flat property and hotel earnings.

We made no changes to our FY20 to FY22 earnings estimates. We expect the group’s earnings to be supported by the logistics segment in the short to medium term given the current property market downturn. However, we’re seeing a lack of potential upside catalysts. In addition, the FY20E price-earnings ratio of 42 times is expensive and earnings visibility remains weak, mainly due to a weak property market. 

We reaffirmed our “sell” call with an unchanged TP of 33 sen, with key upside risks being competition easing in the logistics sector and stronger-than-expected property sales. — Affin Hwang Capital, Aug 16