This article first appeared in The Edge Malaysia Weekly, on October 19 - 25, 2015.

JOHOR Baru-based Tiong Nam Logistics Holdings Bhd, which saw flat earnings in the financial year ended March 31, 2015 (FY2015), is banking on its cold room services to be the group’s next growth engine.

In FY2015, Tiong Nam generated a net profit of RM74.3 million, compared with RM74.6 million a year ago. The muted results were against the backdrop of higher finance cost, depreciation provision and amortisation expenses.

Tiong Nam has one of the largest number of cold rooms in Malaysia, with seven in Kampung Baru Hicom, Shah Alam, and Bangi, Selangor. The company manages 503,341 sq ft of cold room space. Its cold rooms have multi-temperature capabilities — frozen, chilled and ambient — enabling the company to serve a wide range of customers, storing products ranging from chocolate, chemicals and camera films to raw materials used in aircraft production.

Tiong Nam’s customers are tobacco firms, electronics companies and fast-moving consumer product providers as well as food and beverage manufacturers and distributors of perishable items like fresh fruit, eggs and poultry products.

Tiong Nam managing director Ong Yoong Nyock, who founded the logistics firm, sees a growing demand for its cold room services.

“We are still expanding, our sales volume from cold room services is expected to increase 15% a year. Currently, it contributes 20% to 25% of our total warehouse sales,” the low-profile, media-shy Ong tells The Edge in a rare interview.

Cold chain service is a high-barrier, capital- intensive business, he says. Hence, Tiong Nam’s competitors may find it difficult to venture into this new area.

“I think it’s a bit too late for them to come in now because you really need to invest a lot of money, and it’s very technical. Yes, some of them may also have cold room services, but their storage capacity is not as big as ours. More importantly, we are quite familiar with this business,” says Ong.

Building a cold room isn’t as simple as setting up a warehouse. Each cold room usually takes six to seven months to be completed, and it is preferable to build it in a new warehouse with thick insulation.

Ong has not set any target for Tiong Nam’s cold room expansion plan, as it depends on how fast the company can secure new customers.

“We don’t build and wait because the cost is quite high. On average, we spent about RM300 psf for the built-up areas of cold rooms in previous years. Now, the cost has gone up to RM400 to RM500 psf,” he says.

The 63-year-old Ong has 37 years of experience in the logistics industry. He started the transport business in 1975 with a small fleet of lorries transporting general cargoes in Johor.

Today, Tiong Nam has become a home-grown total logistics service provider covering all the major routes of Peninsular Malaysia, Sabah and Sarawak. It is the largest trucking company in the country with about 2,000 lorries of various capacities, including open, box, bonded and refrigerated containers. The company also has offices in Singapore and Thailand, providing cross-border services between Malaysia and the two countries.

Ong’s wife, Yong Kwee Lian, and their son Victor Ong Wei Kuan are executive directors of Tiong Nam, while his brother Ong Eng Teck and his brother-in-law Yong Seng Huat are also board members.

Tiong Nam saw its share price fall 16.6% from a 52-week high of RM1.32 on Feb 16, to settle at RM1.10 last Tuesday, giving it a market capitalisation of RM458.3 million. The stock is trading at a trailing 12-month price-earnings ratio (PER) of 6.14 times.

In comparison, Century Logistics Holdings Bhd and Harbour-Link Group Bhd have slightly higher PERs of 7.71 times and 8.87 times respectively. Other logistics players — Tasco Bhd, Freight Management Holdings Bhd and Transocean Holdings Bhd — are trading at double-digit PERs.

In an Oct 12 report, Hong Leong Investment Bank (HLIB) research analyst Abdul Hadi Manaf says Tiong Nam is currently trading at undemanding valuation of less than seven times PER, compared with its peers’ average of 11 times, making it appear attractive for the logistics theme.

However, it may not be an apple-to-apple comparison, considering property development contributes quite a large chunk to its revenue. A research analyst with a local brokerage firm says, unlike other logistics players, Tiong Nam derives its earnings substantially from property development. In FY2015, the property development division contributed 58% to the group’s profit before tax.

Therefore, he says, the discount in terms of Tiong Nam’s PER could possibly be due to more cautious sentiment in the property sector in general. “It could also be partly due to a higher net gearing level compared with its peers such as Tasco, Century Logistics,Freight Management and Complete Logistic Services Bhd,” says the analyst.

Commenting on the stock valuations, Ong says Tiong Nam’s share price can easily hit the RM2 level, if the stock is valued at a PER of 12 to 15 times.

“I would say Tiong Nam is a good logistics counter because we pay dividends every year and the company continues to grow. We are everywhere in the country, our network is the best,” he says.

However, when asked about the company’s plan to hive off its warehouses into a real estate investment trust (REIT), Ong declines to comment.

To recap, On Oct 5, The Edge, citing sources, reported that the spin-off listing of Tiong Nam’s warehouse REIT, which could be worth more than RM1 billion, is expected to take place in the second half of 2016.

Interestingly, according to theedgemarkets.com, the likelihood of a corporate exercise for Tiong Nam (fundamental: 1.10; valuation: 2.60) is high.

The listing of the REIT would enable Tiong Nam to raise fresh capital and pare down its borrowings. Tiong Nam had a high current ratio of 1.32 times as at June 30, while its net gearing ratio was 0.97 times.

Tiong Nam now owns 78 warehouses nationwide, with a combined storage capacity of 5.7 million sq ft. This includes general warehouses, bonded warehouses, cold rooms and free trade zone warehouses. Tiong Nam’s warehouse utilisation rate and cold room utilisation rate was 96.5% and 87% respectively.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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