This article first appeared in The Edge Malaysia Weekly, on October 5 - 11, 2015.

HOME-grown transport company Tiong Nam Logistics Holdings Bhd will finally spin off its warehouses in the second half of 2016 into a long-awaited real estate investment trust (REIT) in a move to unlock the value of its assets as well as ease its debt burden.

According to a source familiar with the matter, Tiong Nam will eventually hold not less than 40% equity interest in the REIT.

It is learnt that the REIT could have a market capitalisation of more than RM1 billion or 2.2 times Tiong Nam’s current market capitalisation of RM462.7 million, based on the stock’s closing price of RM1.11 last Thursday.

“It’s coming up very soon, they are almost there. There shouldn’t be a problem with getting the relevant approvals because Tiong Nam has such a huge asset value, even before the revaluation. So, it’s all about the pricing now,” the source tells The Edge.

With about 2,000 trucks of various capacities, including open, box, bonded and refrigerated containers, Tiong Nam is the largest trucking company in Malaysia today.

Interestingly, according to theedgemarkets.com, the likelihood of a corporate exercise for Tiong Nam (fundamental: 1.10; valuation: 2.40) is high.

The source says the proposed trust is expected to offer a dividend yield of 7%, as REITs are usually required to distribute 90% to 95% of their earnings to shareholders through dividends.

“The company is still working out how to create shareholder value with this corporate exercise. Tiong Nam’s shareholders may get a dividend in specie in the form of units in the REIT, or at least, they will have the right to subscribe for it,” he says.

The source, however, declines to speculate whether Tiong Nam will distribute a special cash dividend to its shareholders. After the listing of the REIT, Tiong Nam is expected to receive a substantial amount of cash and subsequently becomes a zero-gearing company.

It is worth noting that Tiong Nam, a Johor Baru-based total logistics service provider, has been reported to be pursuing a warehouse REIT spin-off since 2012, but it is not known why it is only to be done now.

At the time of writing, the company was not available for comment.

A quick check of Tiong Nam’s 2015 annual report shows that the group had land and buildings valued at RM499.86 million as at March 31, 2015. In other words, if the REIT is worth some RM1 billion as predicted, these properties would be priced at a price-to-book value of two times.

Currently, Tiong Nam manages 78 warehouses across the country, with a combined storage capacity of 5.7 million sq ft.

The company, which owns seven cold rooms in Kampung Baru Hicom, Shah Alam, and Bangi in Selangor — 503,341 sq ft in total — has one of the largest, if not the largest, cold room capacity in the country.

It is understood that in the first stage, only 70% of Tiong Nam’s warehouses that provide good rental yields will be injected into the REIT. As and when the remaining warehouses are performing better, they will be injected into the trust at a later stage.

At the moment, Tiong Nam’s warehouse and cold room utilisation rates are at 96.5% and 87% respectively.

It has not gone unnoticed that Tiong Nam had a high current ratio of 1.32 times as at June 30 this year, while its net gearing ratio stood at 0.97 times. By hiving off the warehouses to the REIT, the group will have more room for bank borrowings.

Tiong Nam is currently trading at a trailing 12-month price-earnings ratio (PER) of 5.91 times. In comparison, other logistics players are trading at double-digit PERs.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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