This article first appeared in The Edge Malaysia Weekly on February 13, 2023 - February 19, 2023
IMPROVED market sentiment, solid performance of initial public offering (IPO) stocks, coupled with the need to raise fresh capital for expansion amid rising interest rates to reduce gearing — it appears that the time is ripe for Tiong Nam Logistics Holdings Bhd to finally spin off its warehouses into a long-awaited real estate investment trust (REIT).
According to sources, Tiong Nam is expected to submit its prospective REIT’s IPO application to Bursa Malaysia this month.
“The merchant banks have been working on the warehouse REIT project for months. It’s a work in progress and is going to happen quite soon, possibly by the first half of this year. Upon listing, Tiong Nam REIT should be worth about RM700 million, with assets coming mostly from the listed company (Tiong Nam Logistics Holdings) at the initial stage,” a source tells The Edge.
Talk of Tiong Nam’s potential warehouse REIT spin-off listing has surfaced and resurfaced again and again over the past decade, but has never materialised as the group — helmed by its managing director Ong Yoong Nyock — did not get the valuation he sought. Ong, 70, is the founder and controlling shareholder of Tiong Nam with an equity interest of 53.4%.
Citing sources, The Edge first reported in October 2015 that Tiong Nam’s warehouses could be spun off into a REIT by the second half of 2016.
In July 2016, Hong Leong Investment Bank’s research analyst estimated that the warehouse REIT could potentially fetch a market value of over RM528.6 million. It is believed that the warehouse REIT spin-off listing exercise would not only re-rate Tiong Nam’s logistics business, but also unlock value for shareholders.
“Tiong Nam has been trying to spin off its warehouses over the last 10 years, but did not get the valuation it wanted. This time, I think it is not just about whether it can get a good valuation or not. It’s more about raising money from an IPO exercise,” says the source.
Notably, Tiong Nam had, in June 2021, signed a long-term lease agreement with Mercedes-Benz Parts Logistics Asia Pacific Sdn Bhd, a subsidiary of global automobile maker Mercedes-Benz AG.
The group is currently building a RM200 million mega warehouse — the largest warehouse in its portfolio to date — for Mercedes-Benz at the Free Commercial Zone in Senai Airport City, Johor. It is slated for completion in the financial year ending March 31, 2024 (FY2024).
Meanwhile, Tiong Nam teamed up with Johor Corp in August last year to build and co-develop a 300-acre state-of-the-art, high-tech logistics park in Sedenak Technology Valley, Johor, which has an estimated gross development value of RM2.39 billion. The project is expected to take more than five years.
The source points out that a REIT’s IPO is one of the viable options to raise some money to deal with Tiong Nam’s current high debt levels, which could increase further considering the capital expenditure (capex) needed for these two huge projects.
“Tiong Nam might need to fork out about RM20 million in the Sedenak project. The group also needs RM200 million to construct the new Senai warehouse. Bear in mind that its cash position has depleted to about RM12 million, while its cash flow turned negative again in FY2022,” he says.
As at first quarter ended June 30, 2022 (1QFY2023), Tiong Nam’s gross borrowings amounted to RM1.056 billion, with a net gearing ratio of 1.32 times (see bar chart).
Headquartered in Johor Baru, Tiong Nam operates 95 warehouses and distribution centres across Malaysia, Thailand, Singapore, Myanmar and Laos, with a total warehousing capacity of 6.8 million sq ft. The group plans to increase such capacity to 7.9 million sq ft by FY2024.
Of the 95 warehouses, Tiong Nam owns 56 and rents out 37. The remaining two warehouses are owned and managed by its business partners in Thailand.
Besides general warehouses that are integrated with delivery services, some of Tiong Nam’s bonded/free trade zone warehouses, which are located in the Klang Valley and Johor Baru, are also equipped with cold rooms and automated retrieval storage system.
Another source highlights that with industrial assets gaining traction since the Covid-19 pandemic, Tiong Nam has a good chance of getting a better valuation as compared to previous attempts.
“Since the reopening of the local economy, demand for industrial properties has been picking up momentum. Tiong Nam’s earnings are mainly coming from its logistics and warehousing services segment, which has been quite resilient since the pandemic,” he says, adding that the group’s property development division is not making any significant financial contribution at the moment.
The source further says higher interest rates might be affecting Tiong Nam’s borrowing costs, which partly explains why the company is pursuing the REIT listing.
“The local IPO market is hot. Everyone is hoping to make some money. Investor sentiment has recovered recently. Meanwhile, Tiong Nam needs the money for future expansion. There are a lot of pull and push factors really,” he explains.
Nevertheless, the source notes REITs could be seen as less attractive in a rising interest rate environment, as investors would have more options to hunt for stable income.
“To make it attractive, Tiong Nam and its bankers need to come up with a REIT proposal that offers decent distribution yields of at least 6% to 6.5%. To me, anything below that will be deemed unattractive,” he observes.
Meanwhile, it will be interesting to find out whether Tiong Nam’s existing shareholders would receive a dividend in specie in the form of units in the REIT, or at least have the right to subscribe for it, if the spin-off listing materialises.
Shares of Tiong Nam had declined by about 30% over the past five years to settle at 80 sen last Friday, giving it a market capitalisation of RM419.65 million. The counter is currently trading at a historical price-earnings ratio (PER) of 75 times.
Tiong Nam’s net profit dropped 54% to RM5.2 million in FY2022, from RM11.4 million a year ago. The group generated earnings of RM2.03 million in the first half of FY2023 ended Sept 30, 2022.
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