Tiong Nam - Affin Hwang Capital › Research › DailyReports › 201… · Thailand and Singapore...

18 July 2016

Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd)

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Total logistics champion

We initiate coverage on Tiong Nam Logistics Holdings (TNL) with a BUY call and SOTP-based 12M target price of RM2.10. We believe TNL is poised to benefit from the rising logistics outsourcing and growing e-commerce fulfilment demand as Malaysia’s largest total logistics solution provider. We expect logistics segment to grow at 14% CAGR on robust demand for warehouse storage space.

Regional logistics champion

With 77 warehouses and more than 2,000 trucking fleet spanning across many parts of the Peninsular Malaysia, Thailand and Singapore, TNL is firmly established as one of the largest regional logistics champion with a storage capacity of 4.7m sq ft. Rising logistics outsourcing, growing e-commerce fulfilment and increasing cold room requirements should boost demand for TNL’s strategically located storage space, keeping utilisation level high. We expect TNL’s capacity to grow at 9% CAGR and margin to expand on ongoing productivity gains and lower labour costs driven by higher automation.

Healthy visibility

Aside from logistics, property development segment is a sizeable earnings driver and contributed 36% to its FY16 EBITDA. Property sales were commendable, averaging 76% take-up rate despite soft sentiment amid a glut. We expect the unbilled sales of RM266m to sustain earnings visibility for the next 2 years. Future growth prospects will be underpinned by undeveloped land banks (153 acres) with an estimated RM1.5 bn GDV.

Potential REIT in the offing

High gearing ratio (0.8x) has dampened sentiment on the stock and led to depressed valuations relative to peers. Management guided that the company could convert its warehouses into a REIT as part of its debt management plan. Assuming a conservative book value disposal at RM532m and a 51% controlling stake, TNL could generate up to RM261m cash which could reduce net gearing ratio to a comfortable 0.4x.

Resilient earnings

We like TNL for its resilient and stable logistic segment while unbilled property sales should act as a buffer to earnings volatility in the property development segment. TNL is currently trading at 7x PER CY16E with a dividend yield of 3-4%, still below its mean of 8x and sector average of 12x. Potential REIT to pare down borrowings could be re-rating catalyst. Key risks are moderating global growth and weak property sales.

Earnings & Valuation Summary

FYE 31 March 2015A 2016A 2017E 2018E 2019E Revenue (RMm) 618.0 572.8 721.0 760.4 847.7 EBITDA (RMm) 138.9 145.5 185.2 198.0 217.6 Pretax profit (RMm) 110.7 107.3 134.8 142.2 156.7 Net profit (RMm) 72.9 79.6 97.9 103.3 113.7 EPS (sen) 17.5 19.1 23.5 24.8 27.3 PER (x) 9.3 8.5 6.9 6.5 5.9 Core net profit (RMm) 72.7 79.6 97.9 103.3 113.7 Core EPS (sen) 17.5 19.1 23.5 24.8 27.3 Core EPS growth (%) 3.3 9.5 23.0 5.5 10.1 Core PER (x) 9.3 8.5 6.9 6.5 5.9 Net DPS (sen) 4.0 5.0 6.0 7.0 8.0 Dividend Yield (%) 2.5 3.1 3.7 4.3 4.9 EV/EBITDA (x) 7.8 8.2 6.5 6.2 6.0 Chg in EPS (%) - - - Affin/Consensus (x) 1.3 1.0 1.3 Source: Company, Affin Hwang forecasts, Bloomberg

Initiation of Coverage

Tiong Nam TNL MK Sector: Transport & Logistics

RM1.62 @ 15 July 2016

BUY (initiation) Upside: +30%

Price Target: RM2.10 Previous Target: NA

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Price Performance

1M 3M 12M Absolute +24.6% +21.8% +39.7% Rel to KLCI +21.6% +26.2% +44.6%

Stock Data

Issued shares (m) 416.5 Mkt cap (RMm)/(US$m) 674/171 Avg daily vol - 6mth (m) 0.6 52-wk range (RM) 0.92-1.67 Est free float 33.4% BV per share (RM) 1.46 P/BV (x) 1.11

Net cash/ (debt) (RMm) (514.4) ROE (2016E) 23.3% Derivatives Yes Shariah Compliant Yes

Key Shareholders

TNTT Realty SB 24.6%

Yoong Nyock Ong 20.0% Astinas Construction 5.0% Source: Affin Hwang, Bloomberg

Aaron Kee; (603) 2146 7612;

[email protected]

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Company background

Total logistics solution provider

TNL is primarily a total logistics solution provider that offers transportation and warehousing services from the point of manufacturing to end customers’ delivery. TNL is also involved in the property development business with major footprints in industrial-related properties in Southern Johor. Its core businesses can be broadly broken into 2 segments: (i) Logistics and Warehousing; and (ii) Property Development. Fig 1: FY17 revenue mix Fig 2: Historical and projected revenue mix

66%

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Source: Company Source: Company, Affin Hwang forecasts

Largest warehouse operator in Malaysia

TNL manages 77 warehouses spanning across borders in Malaysia, Thailand and Singapore. With a storage capacity totalling more than 4.7m sq ft, TNL is the largest warehouse operator in Malaysia and one of the largest in the region. Its warehouse portfolio encompasses wide range of storage capabilities, including general warehousing, bonded and free trade zone (FTZ) warehousing, cold room, automated storage and retrieval system (ASRS) warehousing and spare parts warehousing. Most warehouses are strategically located close to business districts and major trading ports like Port Klang and Port of Tanjung Pelepas. Its strategic positioning minimises delivery lead time and reduces fuel consumption which allows room for competitive tender pricing. All warehouses’ operations are run by warehouse management systems, designed for optimum inventory management and fully integrated with delivery operations. Fig 3: Warehouse capacity breakdown by type Fig 4: Warehouse breakdown by location

General67%

Bonded & free trade zone

23%

Coldroom8%

ASRS2%

Spare parts0%

Klang Valley, 28

Johor, 20

Others, 29

Source: Company Source: Company

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Bonded warehouse as competitive edge

TNL has 4 bonded and FTZ warehouses with a total storage capacity of 700k sq ft. TNL also operates a fleet of bonded trucks to service these warehouses. A bonded warehouse is a duty-free zone like FTZ, authorised by customs authorities for storage of goods on which payment of duties is deferred until the goods are removed. Bonded and FTZ warehouses are popular among importers and exporters, as no tax is paid until the goods are sold, providing cash flow benefits. Common users of bonded warehouses include suppliers of food, wine, tobacco and spirits. Fig 5: Statistics at a glance

Warehouses : 77

Warehouse storage capacity : 4.7m sq ft

Warehouse locations : 22

Warehouse types : 5

Coverage countries : 3

Daily consignments : 3,000

Vehicles : 2,106

Material handling equipment : 200 Source: Company

ASRS to improve productivity

The ASRS was introduced in 2015, as part of TNL’s innovation to enhance its storage productivity. The ASRS is a computer-controlled system which automatically places and retrieves loads from pre-defined storage locations. The system also maintains an inventory of all the stored items. This allows for the maximization of existing storage space by vertical stacking and increasing dense rate, thereby lifting utilisation. The higher automation also reduces labour costs, increase efficiency and accuracy rate for storage and retrieval. The need for forklifts and drivers is also minimized through the integration of conveyors and automated guided vehicles. Management guided that the implementation of ASRS could reduce manpower costs by up to 50%, with a payback period of 10 years. There are plans to introduce more ASRS warehouses, with another 100k sq ft schedule to commence operations in 2016. Fig 6: Warehouses breakdown

Type of warehouse Location No. Storage capacity

(‘000 sq ft)

Utilisation Rate

(%)

General Klang Valley 19 1,496 99

Johor 11 527 90

Others 29 1,129 91

Bonded and FCZ Klang Valley 1 201 100

Johor 8 849 72

Cold room Klang Valley 6 354 77

Johor 1 34 0

ASRS Klang Valley 1 99 86

Spare parts Klang Valley 1 9 100

Total 77 4,698 89

Source: Company

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Largest truck fleet in Malaysia

TNL has the largest truck fleet in Malaysia to complement its warehouse operations with over 2,000 trucks of varying capabilities, including open, box, bonded and refrigerated containers. This allows TNL to transport any type of goods and provide storage at varying temperatures. TNL also operates a large fleet of haulage trucks, prime movers, car carriers and trailers that are equipped to move 20 – 40 foot containers, mainly for hinterland transportations. TNL leverages on its presence in Thailand and Singapore to provide cross border services which include land freight transportation for demountable goods between Singapore-Malaysia, Singapore-Thailand and Malaysia-Thailand. Currently, TNL owns ~10% of the total fleet, or ~200 trucks, while it leases the remaining ~1,900 from third party for a fixed fee. The third party bears all asset-related risks which include the provision of maintenance services. Fig 7: Trucks fleet overview

Type No

18 tonne : 578

8 tonne : 321

3 tonne : 372

1 tonne : 249

Low loader : 11

Heavy Crane : 12

Trailer : 485

Light vehicle : 78

Total : 2,106

Source: Company

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Growth strategies Multi-storey warehouses for capacity expansion

In the pipeline are two multi-storeys warehouses with total 1.6m sq ft capacity and facilities that allow for trucks to be parked on top of the buildings. Multi-storey warehouses have yet to latch on in Malaysia due to the significant outlay upfront, but that could change as strategic land parcels are getting scarce, making vertical expansion a crucial part of logistics business. Multi-storey warehouses allow logistics operations to be conducted near to urban hinterland, which is a captive market. This cuts transit time, burns less fuel while increases appeal to customers requiring shorter delivery lead time. Cold is the new hot

Growing middle class affluence and higher living standards are driving interest on better food quality. Consumers now demand more premium products with shorter shelf life, greater sensitivity to temperature that must travel extended distances and ship quickly to ensure freshness and quality. On-time delivery for perishable goods is on the rise to cater for the proliferation of online grocery shopping. There is an increasing need for a holistic approach for cold chain logistics management to ensure quality delivery. Largest cold room providers

TNL has 7 cold rooms with a total storage capacity of 387k sq ft, making it one of the largest cold room providers in Malaysia. TNL also has a fleet of refrigerator trucks to complement the cold room facilities. Its cold rooms have multi-temperature capabilities – frozen, chilled and ambient – to facilitate the storage of a wide range of goods from chocolate, chemicals and raw materials. Cold room customers are mostly FMCG based companies, the likes of tobacco firms, electronics companies, F&B manufacturers and distributors of perishable items. Higher margins

We gather that cold rooms generally command premium pricing and higher margins, due to strict temperature requirements and higher energy costs. Typically, the rental fees for cold room costs 3x higher than conventional general warehouse and contribute better margins. At 10% of the total storage capacity, we estimate that cold room could contribute up to 20-30% of the total logistics and warehousing revenue, making it a more profitable investment on a per sq ft basis. There are plans to install more additional cold rooms, but management has yet to finalise the detailed expansion plans. One cold room (33k sq ft) is expected to come into operations in FY17 after being taken offline for major maintenance in FY16. We expect utilisation rate to climb from the existing 77%, as demand remains robust for storage & transport of fresh food produce. Halal logistics

Halal logistics is the process of managing the procurement, movement, storage and handling of materials, livestock and (semi) finished inventory of both food and non-food through the supply chain in compliance with the general principles of Shariah Law. The world halal food industry is estimated to increase to U$2.5 trillion by 2019, equal to 21% of global food expenditure, according to Reuters. Halal logistics is gaining popularity domestically, in line with the Government’s aspiration to position Malaysia as the regional halal logistics hub. Malaysia has the potential to develop regionally and serve as a connecting network to the Middle East, given the sizeable Muslim population in the country and neighbouring region (Indonesia). Halal certifications are hard to come by, which leads to natural high entry barrier. To cater to the growing demand, TNL is currently building 2 blocks of halal-certified warehouses in PTP while it has a substantial portion of halal-certified truck fleet.

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Capacity to grow by 9% CAGR

All in, we expect TNL’s storage capacity to grow by 9% CAGR in FY17-21E, with an average utilisation rate of 89%. Excess capacity shouldn’t be an issue, as most of TNL warehouses are now running above bottleneck utilisation rate or close to maximum capacity. In addition, it is estimated that TNL leases 25% of its existing storage capacity from third-party. In any case if the utilisation rate drops sharply, TNL can terminate its current leases and consolidate the goods to other existing warehouses in similar vicinity. Fig 8: Detailed expansion plans Fig 9: Capacity breakdown

Year Type Capacity (sq ft)

FY17 General 20,000

ASRS 100,000

FY18 General 100,000

FY19 Multi-storey 1,600,000

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Source: Company Source: Company, Affin Hwang forecasts

A slice of e-commerce

E-commerce in Malaysia is not only growing rapidly, but also evolving as retailers attempt to satisfy consumer demand ever more quickly and efficiently. This has resulted in unprecedented demand for strategically located logistics warehouse space across many parts of the country. The emergence of e-commerce has changed the competitive landscape of parcel delivery. Malaysia’s e-commerce market size has seen a 31% increase in CAGR from 2010 to 2014, and expects a similar growth rate in the coming years with the local e-commerce hitting U$3.1bn by 2018, according to 11street. Despite the sizeable increase, there is still room to grow as Malaysia’s e-commerce share of the total retail sales remains at 2%. Comparatively, mature e-commerce markets such as Korea garners as much as 15% of the total retail market. The increase in online retail will increase demand for small parcels, more frequent shipments and smaller modes of last-mile delivery. Retailers are likely to minimise cost by reducing storage and inventory, resulting in higher demand being placed on the supply chain for just-in-time delivery. The spill over effect from the e-commerce growth to logistics player is evident, as seen in Pos Malaysia’s courier business (Pos Laju) which registered a 24% CAGR from FY13 to FY15. Similarly, GD Express Carrier (GDEX) also posted a 19% CAGR in the same period for its express delivery. Both Pos Laju and GDEX are established players in the e-commerce scene and are panel delivery partners for Zalora and Lazada, Malaysia’s top e-commerce platforms.

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Ongoing talks for e-commerce entry

TNL is relatively small player in the e-commerce logistics business, which is mostly conducted through its express door-to-door delivery arm, TNTT Packages Express (TNTT). TNL’s mainstay has always been in B2B delivery, as the wide geographical reach in domestic market makes it difficult to penetrate the B2C delivery at competitive price points. However, the management is cognisant of the potential of e-commerce and are already in talk with a few e-commerce giants (both domestic and international) for a slice of growing e-commerce logistics pie. We understand that discussions have reached the tendering stage, and TNL has submitted its bids for complete logistics solution package. TNL should be able to scale up fairly quickly in the e-commerce segment from the low base currently (approximately RM10m) as it already has the resources and know-how for last-mile delivery via TNTT. We believe TNL could leverage on its existing warehouses that are strategically located within major population centres like Shah Alam and Johor Bahru to cope with retailers and distributors demands for on-time delivery. Going regional

In the pursuit of transforming itself into a regional logistics champion, TNL plans to leverage on the formation of the ASEAN Economic Community (AEC) by actively seeking expansion options in Vietnam and Myanmar. Briefly, AEC entails the free trade in goods and services, investment liberalization and the free flow of skilled labour. ASEAN, a group of 10 member nations in the region, has the world’s 3rd largest population and the 7th largest economy. In 2013, intra-ASEAN trade amounted to U$607bn, accounting for 24% of total trade within the region, compared with U$458bn in 2008. The intra-ASEAN trade growth is expected to surpass the global average by 2% to 3% in 2015, according to the Ministry of International Trade and Industry, Malaysia. Higher intra-ASEAN trade promotes higher land freight and hinterland travel, which is poised to benefit trucking fleet owners such as TNL. Beneficiary of logistics outsourcing

The highly fragmented logistics industry in Malaysia has resulted in many small players that specialise in different segments of the logistics supply chain. TNL’s competitive edge lies in its ability to provide a total logistics solution, ensuring safe and efficient passage of goods along the supply chain from producers to end users at competitive pricing. This is in line with the trends for companies to outsource their logistics activities to specialist service providers. The rise of more sophisticated supply chain management to cater for just-in-time and zero-inventory concepts should create more demand for professional logistics services. TNL is the one of the few players that can provide pan-Malaysia access together with complete warehousing capabilities.

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Property development – cautiously optimistic

Niche development in industrial and commercial segment

TNL’s property arm is principally involved in the business of property development. Its portfolio mostly comprises of industrial and commercial developments concentrated in Johor. Property development segment contributes 23% of total revenue but 36% of total EBITDA, due to its more superior margin. Fig 10: EBITDA breakdown Fig 11: Historical financials

Logistics and warehousing

64%

Property development

36%

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Synergistic with logistics segment

The focus on industrial and commercial properties partly shielded it from the residential slowdown that is plaguing the property sector. Despite the difference in nature with its core business, the property development is actually an extension to its logistics and warehousing segment. TNL started to branch out into property development business specialising in industrial and commercial properties, as some of its Singaporean customers were looking to relocate production floor and administrative functions to Johor due to the cheaper land prices and labour costs. Beside warehouses, TNL also builds shops, showrooms and workshops for sale and lease and configures them according to the needs of its customers. Fig 12: Johor property sales data Fig 13: Selangor property sales data

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Decent take-up rate

We continue to see healthy demand, albeit moderated, for semi-detached, multi-use corporate factories from small-scale distributors and small and medium enterprises, which form the bulk of its targeted customer base. Property development segment’s EBITDA margin is respectable at north of 40%, compared to the likes of the residential players who generally command 20-30% EBITDA margin. We also note that average sale take up rate is commendable at 76%, given the soft property market. Fig 14: Property development projects

Projects Location Land area GDV Completion status Take up

rate

(acres) (RMm) (%) (%)

Industrial Park @ PJ Selangor 7.7 129.5 100.0 100.0

Industrial Park 2 @ Shah Alam Selangor 18.4 207.5 100.0 97.9

Business Park @ SiLC 5 Johor 8.0 100.1 100.0 96.6

Business Park @ Kempas 2 Johor 24.8 173.0 100.0 81.1

Pinetree Residence @ Puteri Harbour Johor 3.2 457.8 16.3 65.3

Business Park @ SiLC 7 Johor 9.8 218.8 63.1 75.0

Business Park @ Batu Pahat 8 Johor 10.1 103.6 50.5 25.3

Total 81.9 1,390.3 - -

Source: Company

Unbilled sales to sustain revenue cover

TNL has unbilled sales of RM266m as at 31 December 2015, translating into revenue cover of a little more than a year, providing earnings visibility till FY18. Most of the projects have clocked in more than 75% sales, with the exception of Batu Pahat 8 (commercial; remaining GDV: RM70m) and Pine Tree (residential and hospitality; remaining GDV: RM160m). Management expects FY17 property sales to be sustained by the gradual recognition of the Pine Tree project to the tune of RM200m in sales, as 90% of the project will be completed in the next 12 months. Undeveloped land banks for future launches

Future launches should be underpinned by 153 acres of undeveloped land banks which are primarily situated in Johor (149 acres) and the remaining in Selangor (4 acres). Management guided for potential GDV of RM1.5bn for the land banks which will be developed over the next 5 years. This translates into RM10m GDV per acre, which is conservative and lower than the average selling price of RM300 per sq ft or RM13m/acre in Johor. Fig 15: Land banks breakdown Fig 16: Breakdown by location

Land Size Size Potential GDV

(acre) (%) (RM bn/acre)

Selangor 4.1 3 0.041

Johor 148.6 97 1.486

Total 152.7 100 1.527

Selangor, 4.1

Johor, 148.6


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Financials Logistics and warehousing segment to anchor earnings

We project logistics and warehousing segment earnings to grow at a CAGR of 14% in FY17-21E on the back of: (i) 9% CAGR capacity expansion; (ii) yield improvement on higher storage fees; and (iii) margin expansion on better portfolio mix offerings. Capacity growth will be largely underpinned by the two massive 1.6m sq ft multi-storey warehouses to be commissioned by FY19. Fig 17: Logistics and warehousing financials Fig 18: Property development financials

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Source: Company, Affin Hwang forecasts Source: Company, Affin Hwang forecasts

Cautious on property development outlook

We project 2% 5-year CAGR decline in the property development segment to account for the general weaker sentiment and slower new launches. We expect the unbilled sales to exhaust by FY18 and a slower take-up rate on its upcoming launches. EBITDA margin should stay relatively flat at 40%, in line with historical average.

Fig 19: Increasing debt position Fig 20: Manageable gearing ratio

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High gearing ratio manageable

High gearing ratio (currently at 0.8x), whilst a valid concern to most investors, is still manageable, in our view. Most borrowings are backed by warehouses as collateral, which are cash flow positive for loan payment. Interest cover is healthy at more than 5x. We expect capital spending to remain elevated in near-term as management is committed to continue to invest in warehouse construction, and land banking activities which have long payback period.

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Fig 21: Healthy free cash flow to sustain dividend

payment

Fig 22: Implied DPR above 25%

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Potential REIT to unlock value

Management is cognisant of the high gearing ratio which has somewhat dampened sentiment towards the stock. Despite the overall leadership position in the industry, TNL has been trading at lower valuations compared to the likes of Freight Management (trailing 10x PER) and Tasco (trailing 11x PER). Talks have been rife on the potential REIT of its warehouses to unlock value. We understand that the proposal is now in advance stage, pending final valuations to be agreed upon before tabling to the board of directors and shareholders for approval. Proceeds from the disposal can then be used to pare down borrowings and/or declare as special dividends. Assuming that the warehouse will be disposed into a REIT structure at conservative book value of RM532m and TNL holding a controlling stake of 51%, the company is set to generate RM261m in cash which will bring down the net gearing level to a more manageable 0.4x. Decent dividend yield

TNL does not have a dividend policy but it has been paying out consistent dividends with an implied payout ratio of at least above 20% over the past few years. We project a dividend payout ratio (DPR) range at between 25% and 30% for FY17-21E, with an implied decent dividend yield of 3-5%. We expect a gradual improvement on TNL’s free cash flow projections largely on better working capital management to sustain dividend payment moving forward. More importantly, improving free cash flow should reduce TNL’s reliance on borrowings for its capacity expansion and thus alleviate pressure on its gearing.

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Valuation and Recommendation Initiate coverage with BUY

We initiate coverage on TNL at BUY with a SOTP-based 12M target price of RM2.10, which implies 30% upside potential from last close. The resilient nature of the logistics and warehousing segment should provide stable and steady growth visibility, in line with the storage capacity expansion. We expect utilisation rate to remain elevated on robust demand for cold room services and rising logistics outsourcing trend. Potential e-commerce logistics solution package wins will be an added bonus, in our view. The RM266m unbilled sales should sustain property development segment growth while future project launches in undeveloped land banks will underpin sales prospects. While the slowdown in residential property sales has dampened overall demand, TNL should be relatively insulated due to its niche exposure in industrial and commercial properties. Fig 23: Target price breakdown

Value

Value per

share

Remarks

(RM m) (RM)

Logistics and warehousing 953.1 1.52 DCF valuation, WACC: 7% Property development 560.5 0.89 DCF valuation, WACC: 7% Investment property 111.6 0.18 Latest book value

Enterprise value 1,625.2 2.59

Net debt (526.6) (0.84) As at FY17 Warrant proceeds 210.0 0.34 All warrants exercised at RM1.00 by CY18

Equity value/target price 1,308.6 2.10

Share price 1.62

Upside/(downside) 30%

Notes: Number of shares 416.5 Number of outstanding warrants 210.0

FD number of shares 626.5 Source: Affin Hwang forecasts

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Below mean valuations

TNL currently trades at approximately 7x PER CY16E, with an implied dividend yield of 3-4%. Our target price of RM2.10 translates into 10x PER CY16E, which is higher than its mean valuations of 8x PER but below sector average of 12x. Fig 24: PE band since 2007 Fig 25: PB band since 2007

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

+1SD: 0.9x

Avg: 0.6x

-1SD: 0.2x

Source: Company, Affin Hwang Source: Company, Affin Hwang

Fig 26: Peers comparison Stock Ticker Sh Pr Mkt Cap Core PE (x) EPS growth (%) EV/EBITDA (x) P/BV ROE (%) Net Div Yield (%)

(RM) (RMm) CY14 CY15 CY14 CY15 CY15 CY16 (x) CY14 CY15 CY14 CY15

Century Logistics CLH MK 0.86 327.0 9.4 9.9 40.7 (5.5) 9.2 8.2 1.1 12.7 11.4 9.4 7.6

Complete Logistics CLSB MK 0.80 98.0 8.6 25.8 (32.6) (66.7) 6.8 4.5 0.8 4.4 11.3 na na

Freight Management FMH MK 1.18 209.6 8.9 9.9 (7.0) (10.5) 6.7 6.4 0.9 12.9 10.4 4.2 4.4

Habour Link HALG MK 0.92 368.4 8.8 7.0 487.2 27.1 5.3 4.0 1.2 17.9 18.0 2.0 2.7

Tasco TASCO MK 1.55 310.0 10.2 11.2 28.9 (8.3) 4.8 4.3 1.0 11.60 10.1 2.6 2.9

Tiong Nam TNL MK 1.62 674.7 10.1 8.5 36.2 18.6 9.7 8.6 1.1 18.2 15.5 2.2 2.9

Average 9.3 12.0 148.3 22.9 7.1 6.0 1.0 12.9 12.8 4.1 4.1

Min 8.6 7.0 (32.6) (66.7) 4.8 4.0 0.8 4.4 10.1 2.0 2.7

Max 10.2 25.8 487.2 27.1 9.7 8.6 1.2 18.2 18.0 9.4 7.6 Source: Affin Hwang forecasts, Bloomberg

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Risk Moderating global growth

Logistics demand shares close correlation with economic activities. Our economist expects Malaysia GDP to grow at 4.5% in 2016. Any potential drastic slowdown in economic growth will impact trade volume, which then leads to lower transportation and warehousing demand. We understand that in any case of drastic decline in utilisation rate, the company could terminate the warehouse lease and renegotiate for a leaner trucking fleet as part of its asset-light model. Weak property sales

Earnings derived from the property development segment can be highly volatile, largely due to the cyclical nature of the industry. As revenue recognition will depend on project completion status and take-up rates, any slowdown in new project launches will have adverse impact on earnings.

29 June 2016


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TNL – FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Mar (RMm) 2015A 2016A 2017E 2018E 2019E FYE 31 Mar (RMm) 2015A 2016A 2017E 2018E 2019E

Revenue 618.0 572.8 721.0 760.4 847.7 Growth

Operating expenses (479.1) (426.3) (535.9) (562.3) (630.1) Revenue (%) 15.9 (7.3) 25.9 5.5 11.5

EBITDA 138.9 146.5 185.2 198.0 217.6 EBITDA (%) 2.3 4.8 27.2 7.0 9.9

Depreciation (14.6) (18.6) (23.9) (26.4) (29.3) Core net profit (%) 3.3 9.5 23.0 5.5 10.1

EBIT 124.3 127.9 161.3 171.6 188.3

Net interest income/(expense) (18.6) (21.8) (27.9) (31.0) (33.4) Profitability

Associates' contribution 4.8 1.2 1.4 1.5 1.7 EBITDA margin (%) 22.5 25.4 25.7 26.0 25.7

EI 0.2 - - - - PBT margin (%) 17.9 18.7 18.7 18.7 18.5

Pretax profit 110.7 107.3 134.8 142.2 156.7 Net profit margin (%) 11.8 13.9 13.6 13.6 13.4

Tax (27.9) (21.8) (29.7) (31.3) (34.5) Effective tax rate (%) 25.2 20.3 22.0 22.0 22.0

Minority interest (9.9) (5.9) (7.2) (7.6) (8.5) ROA (%) 6.0 5.5 6.2 5.9 6.0

Net profit 72.9 79.6 97.9 103.3 113.7 Core ROE (%) 15.1 12.9 14.0 13.2 13.1

ROCE (%) 7.5 6.6 7.2 6.8 6.8

Balance Sheet Statement Dividend payout ratio (%) 22.9 26.2 25.5 28.2 29.3

FYE 31 Mar (RMm) 2015A 2016A 2017E 2018E 2019E

PPE 678.7 940.0 1,034.2 1,131.9 1,248.0 Liquidity

Other non-current assets 11.4 3.5 3.5 3.5 3.5 Current ratio (x) 1.2 1.4 1.6 1.7 1.8

Total non-current assets 690.1 943.5 1,037.7 1,135.4 1,251.5 Op. cash flow (RMm) 59.7 98.3 130.9 117.1 103.1

Cash and equivalents 22.4 9.9 67.7 101.5 96.0 Free cashflow (RMm) (41.5) (63.6) 12.8 (7.0) (42.2)

Inventory 264.5 280.4 244.9 256.8 288.0 FCF/share (sen) (10.0) (15.3) 3.1 (1.7) (10.1)

Trade receivables 170.5 187.6 200.8 211.8 236.1

Other current assets 68.9 38.8 38.8 38.8 38.8 Asset management

Total current assets 526.3 516.7 552.2 608.9 658.9 Inventory turnover (days) 207.8 246.4 189.8 189.8 189.8

Trade payables 60.2 76.4 56.0 58.7 65.8 Receivables turnover (days) 100.7 119.5 101.7 101.7 101.7

Short term borrowings 197.9 122.0 122.0 122.0 122.0 Payables turnover (days) 47.3 67.1 43.4 43.4 43.4

Other current liabilities 188.7 177.3 177.3 177.3 177.3

Total current liabilities 446.8 375.7 355.3 358.0 365.1 Capital structure

Long term borrowings 262.2 422.6 492.6 562.6 632.6 Net Gearing (x) 0.9 0.8 0.8 0.7 0.7

Other long term liabilities 26.6 43.9 43.9 43.9 43.9 Interest Cover (x) 6.7 5.9 5.8 5.5 5.6

Total long term liabilities 288.8 466.6 536.6 606.6 676.6

Quarterly Profit & Loss

Shareholders' Funds 458.2 601.9 674.8 749.0 829.4 FYE 31 Mar (RMm) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16

Revenue 189.7 134.7 138.1 173.9 126.1

Cash Flow Statement Operating expenses (136.2) (112.0) (119.3) (135.0) (78.7)

FYE 31 Mar (RMm) 2015A 2016A 2017E 2018E 2019E EBITDA 57.6 26.9 23.3 43.6 52.7

PAT 82.8 85.5 105.1 110.9 122.2 Depreciation (4.1) (4.2) (4.5) (4.7) (5.3)

Depreciation & amortisation 14.6 18.6 23.9 26.4 29.3 EBIT 53.5 22.7 18.8 38.9 47.4

Working capital changes (50.7) 7.4 1.8 (20.1) (48.4) Net int income/(expense) (2.0) (4.2) (6.5) (5.9) (5.2)

Others 13.0 (13.2) - - - Associates' contribution 2.2 0.8 (0.1) 0.4 -

Cashflow from operations 59.7 98.3 130.9 117.1 103.1 Exceptional items 0.2 - - - -

Capex (101.6) (163.7) (118.1) (124.2) (145.4) Pretax profit 53.9 19.3 12.2 33.4 42.2

Others (7.8) 26.1 - - - Tax (12.6) (4.9) (4.0) (7.9) (5.0)

Cash flow from investing (109.4) (137.6) (118.1) (124.2) (145.4) Minority interest (5.7) (0.9) (0.8) (3.5) (0.7)

Debt raised/(repaid) 66.5 77.5 70.0 70.0 70.0 Net profit 35.6 13.5 7.4 22.0 36.5

Equity raised/(repaid) 0.2 - - - - Core net profit 35.4 13.5 7.4 22.0 36.5

Dividends paid (10.5) (16.7) (25.0) (29.2) (33.3)

Others 31.4 36.9 - - - Margins (%)

Cash flow from financing 24.8 23.9 45.0 40.8 36.7 EBITDA 30.2 19.9 16.9 25.0 41.8

PBT 28.2 14.3 8.8 19.2 33.5

Free Cash Flow (41.5) (63.6) 12.8 (7.0) (42.2) Net profit 18.7 10.0 5.4 12.7 28.9 Source: Company, Affin Hwang forecasts

29 June 2016


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Important Disclosures and Disclaimer

Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a

recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, i ts associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005

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