Tat Hong Holdings

OCBC on 20 Sept 2012

Tat Hong Holdings (Tat Hong) announced the placement of 70m new ordinary shares at S$1.20 per share, or a discount of 8% to Monday’s closing price (S$1.30). This represents a 13.9% enlargement of Tat Hong’s ordinary share capital (excluding treasury shares). About half of the net proceeds will be used to expand Tat Hong’s highly profitable crane fleet (with ~60% gross margins). The remaining half of the net proceeds will be used to fund acquisition of land and buildings in Singapore and Malaysia as well as refinancing purposes. In our view, Tat Hong will continue to benefit from growing demand in the infrastructure, oil & gas and resources sectors in the medium to longer term, and raised our fair value estimate to S$1.42 (previously S$1.39) on 12x (previous 11x) FY13F EPS. Maintain BUY.

Placement to institutional and accredited investors
Tat Hong Holdings (Tat Hong) announced the placement of 70m new ordinary shares at S$1.20 per share, or a discount of 8% to Monday’s closing price (S$1.30). This represents a 13.9% enlargement of Tat Hong’s ordinary share capital (excluding treasury shares). We understand that the new shares are placed out to institutional and accredited investors. The net proceeds of S$82m, after deducting an estimated S$1.9m of expenses, will be used to (i) strengthen the group’s capital structure and fund its growth.

Expanding the mobile/crawler crane fleet
More specifically, about half the net proceeds will be used to expand Tat Hong’s highly profitable crane fleet (with ~60% gross margins). To cater for the growing demand in the region, we believe it is likely to purchase more medium-tonnage (200-500 MT) crawler/mobile cranes. The budgeted S$40m should also provide sufficient firepower. Assuming the typical hire purchase arrangement (20% equity financing, 80% debt), the group can theoretically purchase up to S$200m of crane assets.

Lowering its funding costs
The remaining half of the net proceeds will be used to fund acquisition of land and buildings in Singapore and Malaysia to support the expanded crane fleet, as well as for general corporate funding and refinancing purposes. We estimated Tat Hong to have about S$200m in finance lease with an effective (blended) rate of ~6.9%. For every 1% lowering of its effective interest rate, Tat Hong would be able to achieve S$2m in savings.

BUY; FV raised to S$1.42
Although existing shareholders’ stakes are diluted with the placement, we feel there is still upside for both existing and new shareholders. In our view, Tat Hong will continue to benefit from growing demand in the infrastructure, oil & gas and resources sectors in the medium to longer term and raised our fair value estimates to S$1.42 (previously S$1.39) on 12x (previous 11x) FY13F EPS. Maintain BUY.