Tiong Nam confident of better times ahead as warehouse rental rates soar

12 Jun 2024

TIONG Nam Logistics Holdings Bhd (KL:TNLOGIS) is confident that the group’s financial situation will improve over the next two quarters as warehouse rental rates in Johor and Kulim hit all-time highs, owing to higher demand for logistics services.

At the same time, the group’s investments in new warehouses, especially the one in Senai Airport City near the Senai International Airport in Johor, have matured and are providing steady returns to Tiong Nam.

“We foresee in the next quarter and the quarter to come that things should get better because we have come to a point where we can leverage the new warehouses [for growth],” says Tiong Nam deputy managing director Victor Ong.

Victor, 43, is the son of Ong Yoong Nyock, founder and largest shareholder of Tiong Nam, with a 53.4% stake.

“Warehouse prices now are at a high, I would say, even in Shah Alam and especially in Kulim. Johor is very good now because of the RTS (Johor-Singapore Rapid Transit System) and property prices.

“In terms of warehousing, we are at a high level [of rental rates across the country],” Victor tells The Edge in a recent interview at the group’s headquarters in Johor Bahru.

The Senai Airport City warehouse — a 1.1 million sq ft mega-warehouse facility — was built at a cost of RM200 million. It is the largest warehouse in Tiong Nam’s portfolio and is leased to Mercedes-Benz for its regional parts logistics.

The warehouse was completed and handed over to Mercedes-Benz in August 2023 and the lease started in November 2023.

According to Victor, warehouse rental rates in Johor Bahru have been rising from roughly RM1.40 psf before the pandemic to between RM1.80 psf and RM2.00 psf currently. Meanwhile, the rates are higher in the ports; Johor’s major ports are Johor Port and Port of Tanjung Pelepas (PTP).

Meanwhile, warehouse rental rates in Kulim shot up from around RM1.20 psf prior to the pandemic to between RM2.50 and RM2.80 psf currently, owing to a severe shortage of warehousing space, says Victor.

Owning warehouses could prove to be a boon for Tiong Nam today, but the group has taken on a lot of debt to build its portfolio. The company operates 96 warehouses and distribution centres across Malaysia, Thailand, Singapore and Laos, with a total warehousing capacity of 7.7 million sq ft as at March 31, 2024.

Tiong Nam had incurred additional costs while the Senai Airport City warehouse was being built due to rising interest rates on the loans taken to build it as well as manpower getting expensive.

“The higher interest rate had cost us an increase of more than RM10 million in finance costs [compared with when interest rates were low during the pandemic],” says Victor.

Indeed, Tiong Nam’s finance costs in the financial year ended March 31, 2024 (FY2024) jumped 44.9% year on year to RM67.45 million from RM46.55 million. Its long-term debts increased by 27.5% y-o-y to RM1.174 billion from RM920.85 million and its short-term debts rose by 6.87% y-o-y to RM400.39 million.

Repayment of term loans increased by 77.17% y-o-y to RM65.59 million from RM37.02 million. At the same time, the group’s bread-and-butter integrated logistics business suffered from razor-thin margins.

For FY2024, Tiong Nam reported a net profit of RM56.97 million, compared with RM28.07 million in the corresponding period. The surge was due to an RM75.47 million fair value gain on several warehousing assets in Johor, including the Senai Airport City mega warehouse.

Stripping the one-off revaluation gain, the logistics and warehousing segment made a pre-tax loss of RM5.94 million in FY2024.

According to Victor, high borrowings should not be an issue for the group, as they are used to grow the business.

“We cannot miss the moment,” he says, when asked about the group’s rather aggressive warehouse building plan and land banking, fuelled by both long- and short-term borrowings.

“We have a bit of an advantage in logistics now because we purchased [warehouses] all the time in the past; so, it can have a direct influence on our pricing. If you rent, the impact [on Tiong Nam’s profitability] would be even bigger [than the impact from the holding costs].

“At least for now, we own most of our properties so that we can have better control over our pricing and become competitive. That’s why we cannot wait; when we have money, we will reinvest in the business.”

Tiong Nam has been investing, betting big on the demand for warehouses in Malaysia, especially in its home state of Johor, where it is building a warehouse on a 9.99-acre site in the PTP with a total built-up area of 820,148.08 sq ft.

In Kedah, Tiong Nam is building a warehouse with a total built-up area of 211,383.85 sq ft on a 10.82-acre tract in Mukim Padang China, Kulim, and a 121,722.58 sq ft warehouse on a 14.73-acre site in Bandar Kulim.

The PTP facility is expected to be completed in September and the Mukim Padang China warehouse is expected to be completed soon. The construction of the Bandar Kulim facility began in March and is expected to be completed within 14 months.

Tiong Nam is also developing a five-storey warehouse in the Sembawang Planning Area in Singapore. The warehouse will have a total built-up area of 228,767.27 sq ft on a 2.47-acre site and is expected to be completed by October.

Victor says the term loans are backed by the rental rates of the warehouses, and now that the Senai Airport City mega warehouse has been completed and is generating revenue for Tiong Nam, the loans are safe.

“All our borrowings are for reinvestment into the business; we use them to grow our business,” he says, adding that while Tiong Nam is operating at a tight margin at the moment, over time, the value of its properties will go up, while the outstanding loan will be reduced.

Tiong Nam managed to maintain its interest coverage ratio above 1.3 times in the last five years, even though finance costs spiked to RM67.45 million in FY2024 from RM47.21 million in FY2020.

In FY2024, however, Tiong Nam’s Ebit (earnings before interest and taxes) was inflated by the revaluation gain to RM141.11 million. Stripping the one-off gain, Ebit would have been RM107.07 million, a level at which Tiong Nam’s interest coverage ratio stood at 1.59 times in FY2024, which is higher than its historical level. This means the company has been able to manage its debts and finance costs over the last five years.

Victor says: “Logistics is a business where you need time — I would say eight to 10 years — to recover your investments … Of course, [we have short-term loans], as we need to roll the business, but why are banks willing to give us long-term loans? Because they know the nature of our business. So, our loan range will not be less than 20 years, sometimes even 30 to 35 years.”

As the group has amassed huge long-term debts, the question of whether it will be spinning off its assets into a real estate investment trust (REIT) has come up again. Talk of Tiong Nam’s undertaking such an exercise had been reported as recently as 2015.

Victor says while the group continues to look at REITs as a possible venture, it has other ways to pare down debts, if needed.

Tiong Nam’s share price has risen nine sen, or 11.43% year-to-date, closing at 78 sen on May 30, valuing the group at RM401 million and 7.12 times its trailing 12-month earnings per share.

Its closest competitor, Swift Haulage Bhd (KL: SWIFT), saw its share price rise 7.14% year-to-date to 57.5 sen, valuing the group at RM507.7 million, with a trailing 12-month price-earnings ratio of 6.79 times.

Source: The Edge Malaysia