Lo­gis­tics sec­tor hit by mar­gin ero­sion

But Tiong Nam’s core lo­gis­tics and ware­hous­ing busi­ness seg­ment re­turns to the black

The Star Malaysia - StarBiz - - Companies & Strategies - By GANESHWARAN KANA [email protected]­tar.com.my

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.

Im­proved re­sults: Tiong Nam’s core lo­gis­tics and ware­hous­ing busi­ness made a pre-tax profit of RM4.9mil in the lat­est quar­ter as higher de­liv­er­ies and new clien­tele pushed the seg­ment’s rev­enue up by 9.1%.

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