Logistics sector hit by margin erosion
But Tiong Nam’s core logistics and warehousing business segment returns to the black
COMPETITION in the domestic logistics scene is heating up, against the backdrop of rising demand for parcel and larger goods deliveries in Malaysia. While greater competition is good for the end-consumers, many logistics players have been hit by margin erosion as a result.
This year’s third quarter earnings season ended up unfavourable for the logistics sector. In the period of July to Sept 2018, the bottom line of logistics providers Tasco Bhd and GD Express Carrier Bhd declined by 70% and 18% year-on-year (y-o-y), respectively.
CJ Century Logistics Holdings Bhd saw its earnings dipping by 3.6% y-o-y, while Xin Hwa Holdings Bhd’s net profit fell by nearly 33% y-o-y. Pos Malaysia Bhd took a greater hit compared to its sector peers as the group fell into red in the three-month period, with a net loss of RM16.58mil.
Unlike the others, Tiong Nam Logistics Holdings Bhd’s earnings story turned out slightly different in the latest quarter. Its core logistics and warehousing business segment returned to the black with a pre-tax profit of RM4.9mil, as higher deliveries and new clientele pushed the segment’s revenue up by 9.1% y-o-y to RM137.8mil.
However, Tiong Nam’s overall earnings at the group level took a plunge by 82% y-o-y to RM2.22mil in its second quarter ended Sept 30, as topline was slashed by about 12%.
The major reason? Disappointing property sales. Declining progress billing due to the group’s property development projects reaching completion dragged down the segment’s revenue by nearly 71% y-o-y in the second quarter.
Tiong Nam recorded a sharply-lower unbilled sales of RM2mil in the second quarter as compared to RM80.2mil a year earlier, post-completion of its Pinetree Marina Resort development.
Moving forward, the group only has one project in the pipeline – the Kota Masai township – which will likely be launched by March 2019 with an estimated gross development value (GDV) of RM150mil.
In an earlier note, Tan Kam Meng of TA Securities Research says that Tiong Nam’s property division is expected to be under pressure due to soft market condition.
“The depletion of unbilled sales to RM2mil indicates that earnings visibility is very low and future profit would depend on sales of completed unsold properties,” he says, adding that the company has estimated unsold GDV of RM812mil.
Taking a cautious approach in light of the challenging property scene, Tiong Nam managing director Ong Yoong Nyock tells StarBizWeek that the group will “wait for the right time to launch any new development”.
When asked whether Tiong Nam may exit the property business and become a logistics and warehouse pure-play, Ong says the group intends to retain the property development business.
“We believe there is significant value yet to be unlocked from our sizeable land bank of 160.4 acres in Johor and Selangor. We would continue to monitor developments in the property market and launch our projects at a more opportune time,” he says.
Logistics and warehousing
Established in 1975, Tiong Nam is one of Malaysia’s largest integrated logistics company, offering general transportation, cross-border transfer, door-to-door delivery, freight services and car carrier services, among others.
The group also has 83 warehouses in 23 locations across four countries – 76 in Malaysia, four in Singapore, two in Thailand and one in Myanmar.
Over the years, Tiong Nam has witnessed a steady increase in the number of clientele served by its core logistics and warehousing services segment.
According to Ong, the number of clients in the segment has risen to 2,263 in financial year 2018 (FY18), up from 2,101 in FY15. He adds that the logistics and warehousing ser- vices segment also saw the addition of various prominent multinational and domestic brands from the consumer and industrial sectors.
“Our key target is to grow the segment’s revenue, through new clients and increased orders from existing ones. This has always been our focus and we hope to exceed FY18 performance,” he says.
TA Securities Research, in a note, says that Tiong Nam has secured five major MNC clients this year – O-I BJC Glass Malaysia, Jotun Chemical, Tesco, Nestle and Heineken
It also says that the addition of the five new clients would likely boost Tiong Nam’s warehouse occupancy rate to 80% in FY19 and 90% in FY20, up from the average of 70% in FY18.
“This would mean earnings contribution from the logistics and warehousing division is expected to rise in FY19-FY20,” its says.
Narrowing down on Tiong Nam’s logistics sub-segment, Ong points out that its net profit margin improved substantially from -1.02% in the first half of FY18 to 3.31% in the first half of FY19.
The increase in bottom line margin was not only driven by Tiong Nam’s new clients but also through higher deliveries for existing customers. Additionally, the logistics segment registered lower average costs due to the increased warehouse utilisation.
Since FY17, the group has set up its new overseas distribution centres and offices in China, Vietnam and Myanmar. This is primarily intended to expand Tiong Nam’s business footprint across the South-East-Asian region up to China.
As for the warehouse sub-segment, Ong says the group’s warehousing capacity has been expanded recently. From a capacity of 4.8 million square feet as at end-FY16, this has increased to 5.4 million sq ft as at Sept 30, 2018.
On top of that, Tiong Nam has also expanded the regional coverage for its warehousing services business.
“These efforts allow us to target more businesses aggressively. Our extensive cross-border logistics and warehousing network spanning from China to South-East Asia places the group in a strong position to benefit from China’s Belt and Road Initiative.
“Furthermore, we stand to be a significant beneficiary of the upcoming boom in e-commerce-related deliveries, as we target potential customers to tap into our wide geographical coverage and extensive infrastructure,” says Ong.
Established in May 2017, Tiong Nam’s lastmile e-commerce delivery service, Instant, has seen growing delivery volume. However, the e-commerce business is yet to breakeven to date, amid competition from new entries in the industry.
Ong declined to disclose the breakeven targets when asked, describing it as “still premature”.
He says Tiong Nam will continue to engage with major companies to explore more collaboration opportunities for Instant in the future.
Ong was also asked about the company’s long-delayed real estate investment trust (REIT) plan in order to pursue an asset-light business model.
While he implies that the plan is still ongoing, he did not provide any specific target for completion.
“We are currently being advised by our adviser on the REIT listing exercise. We are unable to comment on when the exercise will be completed,” he says.
Tiong Nam had said back in 2015 that it had plans to create a REIT out of its logistics assets. Ong, in a previous news report, said that the REIT plan has been delayed due to inability to “agree on the valuations”.
In its July 2016 report, Hong Leong Investment Bank stated that Tiong Nam’s warehouse REIT could potentially fetch a market cap of RM528.6mil.
Currently, the Main Market-listed Tiong Nam posseses a market cap of nearly RM370mil, less than half of its value during its peak in April 2017. Over the last one year, the share price has fallen by 38% to 81 sen as at Dec 7.