This article first appeared in The Edge Financial Daily on November 29, 2017 - December 5, 2017

Tiong Nam Logistics Holdings Bhd
(Nov 28, RM1.32)
Maintain market perform with a lower target price (TP) of RM1.40 per share: Tiong Nam Logistics Holdings Bhd’s core net profit (CNP) for the first half of financial year 2018 (1HFY18) of RM20.8 million came in below expectations at 41% and 39% of our and consensus FY18 full-year earnings forecasts, respectively. No dividends were announced, as expected.

Tiong Nam’s CNP for the second quarter of FY18 (2QFY18) of RM13.8 million improved year-on-year by 6% from RM13.1 million in 2QFY17. The improved results were driven by its property development segment, which saw segmental profit before tax (PBT) double to RM25 million from RM12.5 million, mainly due to unbilled sales recognition. This was offset by the logistics and warehousing segment, which plunged into a loss before tax of RM3.9 million, compared with PBT of RM4.2 million in 2QFY17.

The same explanation applies on a sequential basis as well. Quarter-on-quarter (q-o-q), 2QFY18 CNP almost doubled from RM6.9 million in 1QFY18. Property development segmental PBT jumped 2.8 times from RM8.9 million in 1QFY18, while logistics and warehousing plunged into a loss from segmental PBT of RM1.3 million in 1QFY18.

However, on a cumulative basis, 1HFY18 CNP was weaker by 27% from RM28.4 million in 1HFY17, largely due to the poor 1QFY18 results (recall that 1QFY18 CNP came in -55%/-46% y-o-y/q-o-q). Similarly, the main drag was from the logistics and warehousing segment, with the 1HFY17 segmental PBT of RM15 million deteriorating into a loss before tax of RM2.5 million for 1HFY18.

From our understanding, the loss seen in Tiong Nam’s logistics and warehousing segment thus far is mainly due to operational set-up costs (manpower, warehousing and vehicle rental, etc) for its new ventures, which include  warehousing capacity expansions, cross-border trucking routes, and e-commerce delivery under the brand name “Instant”. With that said, Tiong Nam should be able to break even in the coming few quarters as utilisations start to pick up. On the other hand, near-term earnings should be lifted by its property development segment, through recognition of unbilled sales (RM119 million as at end-1QFY18).

Following the disappointing results, our FY18-FY19 earnings estimates are cut by 7%-10%, as we factor in the poorer performance from its logistics and warehousing segment. Given the high net gearing of 1.1 times to 1.2 times, we also do not discount the possibility of Tiong Nam potentially spinning off its warehouses in an efforts to pare down the gearing level. At current levels, net gearing is in line with one of its comparable peers, Tasco Bhd, but greatly higher than Century Logistics Holdings Bhd, which is at a net-cash position. — Kenanga Research, Nov 28