Analysts see further upside in Tiong Nam’s warehousing division

KUCHING: Tiong Nam Logistics Holdings Bhd's ( Tiong Nam) logistics business is expected to record steady growth ahead while analysts also anticipate potential further upside from its warehousing real estate investment trust (REIT) business.

The research arm of Kenanga Investment Bank Bhd (Kenanga Research) pointed out that Tiong Nam's primary business of logistics and warehousing is expected to show steady growth on the back of warehouse capacity expansions, with bottom-line to be further lifted by its property segment.

Tiong Nam currently operates 77 warehouses with total storage capacity of 4.9 million square feet ( sqft), making it the largest warehouse operator in the country.

“Strengthening its competitive advantage, the company is undertaking further capacity expansion of 50 per cent to 6.5 million sqft by end of the financial year 2019 (FY19).

“Coupled with utilisation rates of 80 to 90 per cent, we believe this would exert positive earnings impact as we forecast a six per cent to 25 per cent revenue growth on the segment in FY17 to FY19, implying a three-year compound annual growth rate (CAGR) of 13 per cent,” it said in its initiation coverage yesterday.

Kenanga Research also expected Tiong Nam's property development to boost the company's bottom-line as it is expected to contribute 69 to 71 per cent of net profits for FY17 to FY19 despite only making up 20 to 31 per cent of the company's revenue.

It explained that this was due to favourable margins.

“It has always been operating at a PBT margin of circa 40 per cent, led by low acquisition cost of its land bank, which we suspect to be much lower than industry average of 15 to 20 per cent of gross development value (GDV).

“Despite having only one project in the pipeline (GDV of RM170 million, expected to launch in FY18), forward earnings will be sustained through revenue recognition of its unbilled sales, as well as sales of its Pinetree Residence and Business Park @ SiLC 7 projects,” it said.

Aside from that, Kenanga Research noted that Tiong Nam intends to spin-off some of its warehouses into a REIT.

It said, “We expect the company to dispose 31 warehouses into the REIT (tentatively valued at RM665 million).

“Cash from the disposal would be used to settle related debt of RM246 million – arriving to a book value holding of RM109 (RM0.26 per share) based on our preliminary calculations, after taking into account Tiong Nam's assumed eventual stake of 26 per cent on the REIT.”

Meanwhile, Kenanga Research believed that Tiong Nam's plans to expand its routes between China and Asean countries are promising in the long run.