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This article first appeared in The Edge Financial Daily on December 18, 2017

Tiong Nam Logistics Holdings Bhd
(Dec 15, RM1.32)
Maintain buy with an unchanged target price (TP) of RM1.80:
The e-commerce boom and China One Belt One Road (Obor) are expected to change the competitive landscape in Malaysia. 

We believe a few industries will be shaken up when opportunities and threats abound. Cross-border road and rail transportation as well as e-commerce last-mile services are those businesses that would see plenty of opportunities in the near future. 

In our opinion, Tiong Nam Logistics Holdings Bhd will be one of the first movers as the group has already kick-started its investment in these areas. However, shareholders have to bear with the short-term losses until Tiong Nam achieves the critical mass. 

We believe while Tiong Nam is slowly reaping the enormous opportunities in e-commerce and cross-border road transportation and we see great opportunities to accumulate Tiong Nam shares at this level. 

Bogged down by additional expenses from rental for lease of new warehouses, staff costs, and interests costs for the logistics and warehousing (L&W) division, typically related to its new cross-border and e-commerce logistics, the division slipped into pre-tax losses of RM3.9 million in the second quarter ended Sept 30, 2017 (2QFY18). 

According to its management, these expenses are important to solidify its foundations before the China Obor and e-commerce reach higher milestones in Malaysia.

Tiong Nam’s ventures into cross-border road transportation and e-commerce have progressed steadily and in line with its management’s expectations.

The group has leased warehouses in Vietnam, Myanmar and China and the construction of a warehouse in Laos is underway. 

The company has also leased shop-cum-warehouses in Cheras and Kepong Kuala Lumpur, Butterworth, Ipoh, Melaka and Johor to facilitate its e-commerce last-mile operations. In other words, Tiong Nam has put in place almost all the necessary assets, except a few more trucks, to complete its cross-border Singapore-Malaysia-Thailand-Laos-Myanmar-Vietnam-China networks.

Tiong Nam’s management is confident that the new cross-border logistics business will break even soon. We suspect the company could have secured a few contracts that would contribute to second half FY18 (2HFY18) earnings.

The Pinetree Residence project is almost completed, pending the issuance of the certificate of completion. As such, the bulk of the unbilled sales of RM80.4 million as at 2QFY18 will be recognised in 2HFY18. If we assume the same profit before tax (PBT) margin of 52% recorded in 1HFY18, the property segment is expected to contribute up to RM42 million PBT in 2HFY18, which is 26% higher than the group’s 1HFY18 core PBT.

For financial year ending March 31, 2019 (FY19), the group is confidence of selling RM100 million worth of unsold properties to fill up the property contribution for FY19 when all its unbilled sales will be exhausted in FY18.

Looking at the list of unsold properties worth RM478.6 million, there are factories in Kampas and some three- and four-storey shophouses in Johor Baru, which could easily find buyers under the current market conditions. In our forecast, we conservatively project Tiong Nam to rake in RM38 million property sales for FY18. — TA Securities, Dec 15
 

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