Tiong Nam Logistics Holdings Bhd (March 8, RM1.60)
Maintain market perform with a target price (TP) of RM1.71: With a current warehousing capacity of 4.9 million sq ft operating near full utilisation, Tiong Nam Logistics Holdings Bhd is further reaffirming its expansion plan. Warehousing capacity is expected to reach five million sq ft in the financial year ending March 31, 2018 (FY18), with the bulk of the expansion expected to come in FY19 through multistorey warehouses in Shah Alam, which would increase capacity by another 1.6 million sq ft. This expansion pipeline would see total warehousing capacity increase to roughly seven million sq ft by the end of 2020 (more than 40% increase from current capacity), with an estimated total capital expenditure (capex) for FY18 to be around RM100 million.
With the company already making test runs for its cross-border trucking routes in the Asean region, commencement of operations is set to be in the first quarter of 2018. Leading up to this, Tiong Nam has newly established distribution centres in Shenzhen, Hanoi and Yangon with one more in Laos, expected to be established in FY18. Tiong Nam seeks to use this as a platform to further tap into the e-commerce last-mile delivery, making it a one-stop centre for e-fulfilment services especially for e-commerce firms in China looking to sell goods to Malaysia/Singapore. While we expect earnings impact to be minimal for the initial phases due to gestation, we also believe this venture carries great potential, given that Tiong Nam is one of the only few players to have direct trucking routes between China and Malaysia/Singapore. We expect capex outlay for its initial operating year to be about RM10 million, mainly for its sales office as well as a new warehouse to support this operation.
While FY18 property development earnings are expected to hold up, largely from the recognition of unbilled sales of RM167.3 million, take-up rates have continued to remain low, especially for Business Park @ Batu Pahat 8 (with a gross development value [GDV] of RM221.4 million, completion expected by end-FY17) and Pinetree Residence (GDV of RM461.9 million, completion expected around early-FY18), with current take-up rates at 28.4% and 68.5%, respectively. Our earnings projections for FY18 imply take-up rates of 53% and 80%, respectively, for the two projects, which we think are still subpar given that they are to be completed by FY18.
We made no changes to our FY17 to FY18 estimates. Our unchanged sum-of-parts TP of RM1.71 is derived from 14 times forward price-earnings ratio (PER) on FY18 for its logistics and warehousing segment, above peers’ average of 12.5 times, and five times forward PER on FY18 for its property development, above small- to mid-cap property players’ average of four times. Tiong Nam seems fairly priced at this junction. No update has been given for its warehousing real estate investment trust (REIT) as it is still stuck in its valuation stage. Thus, we push back our expected time frame of materialisation to FY19 from late-FY18. With that, we reiterate our “market perform” call.
Risks to our call include weaker-than-expected property sales, slower-than-expected execution of warehousing expansions, and sooner-than-expected materialisation of its warehousing REIT. — Kenanga Research, March 8
This article first appeared in The Edge Financial Daily, on March 9, 2017.