Tiong Nam faces near term challenges but long-term prospects intact
KUALA LUMPUR: Tiong Nam Logistics Holdings Bhd (Tiong Nam) could face earnings pressure in the short-medium term as a result of rapid expansion and the start-up of new businesses but analysts are still positive on the group’s long term prospects.
Following an analysts’ briefing with Tiong Nam, MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) said in a report, “While we like Tiong Nam’s long-term prospects as a market leader in logistics and warehousing, we believe the company could face earnings pressure in the short-medium term as a result of rapid expansion and the start-up of new businesses.”
Tiong Nam’s poor first quarter performance stemmed from a surge in expenses due to its rapid expansion of assets for its logistics and warehousing operations, it said.
“Revenue growth, on the other hand, lagged as new assets typically require a three to nine month gestation period before turning profitable.
“Over the span of six months (January 2017 to June 2017), Tiong Nam aggressively expanded its warehousing space by 13 per cent or 618,000 square feet (sqf ) to 5.5m sqf,” it added.
Upon receiving possession of a new warehouse, the research team noted that pallet racking systems are installed and customisation according to different customer requirements is implemented.
“In addition, new capacity is usually absorbed over a 6 month timeframe, causing a less than optimal utilisation rate of assets. Meanwhile, expenses such as staff salaries, rental of warehouses & equipment, as well as interest on borrowings continue to be incurred at full value,” it said.
Besides the costs associated to its new warehouses, MIDF Research further pointed out that Tiong Nam also incurred start-up expenses related to its last-mile and crossborder trucking businesses.
“As a result, earnings before interest and tax (EBIT) margins for the logistics and warehousing division eroded to four per cent (FY16 and FY17 average: 14 per cent).
“We expect expenses to remain heightened, with a propensity to rise further, with RM100 million in capital expenditure (capex) budgeted for FY18,” it added.
Meanwhile, MIDF Research noted that besides serving an e-commerce parcel consolidator from China, Tiong Nam has also secured a large electronics customer for its cross-border business, with daily trips made to Thailand.
Aside from that, it noted that Tiong Nam’s last-mile delivery business, ‘Instant’ currently handles 500 parcel deliveries per day for a popular direct marketing company and an e-commerce platform from China.
“It is in the midst of securing a new local e-commerce platform which specialises in halal products, for its cold chain logistics service. We have yet to impute any contributions from these new businesses,” it added.
With revenue only expected to compensate for the rising costs gradually over the coming quarters, the research team raised its assumptions for operating expenses which led to a reduction in our EBIT margin forecast for the logistics and warehousing division from 12 to nine per cent.
“In addition, we cut our earnings forecast for the property division, as unbilled sales have fallen to RM119 million (January 2017: RM167 million). As such, our earnings forecast for FY18 and FY19 is lowered by 26 and 17 per cent respectively,” it added.