Monday 12 November 2012

Tat Hong Holdings

Kim Eng on 12 Nov 2012

Strong Momentum Continues. Tat Hong announced its 1HFY3/13 results last Friday. Results were exactly in line with our forecast with both revenue and net profit making up 50% of our full year numbers. 1H revenue came in at SGD431.3m, up 26% yoy. Gross profit increased by 33% to SGD164.8m. Net profit grew by 88% yoy to SGD34.0m. The strong performance can be attributed to robust growth in highest-margin Crane Rental sector and turnaround in China business.

Sector performance. Crane Rental sector, which is the highest margin sector, performed very strongly with 58% increase in revenue. Tower crane, which suffered from local shareholder issue last year, posted the second strongest performance with 28% yoy increase in revenue. Distribution sector also registered a 13% increase in revenue while General Equipment Rental revenue increased marginally by 4% yoy.

Expecting higher utilization in 2H. Utilization rate continued to improve on yoy basis. Crawler crane utilization rate stood at a very healthy level of 72.5% in 2QFY13 vs 67.9% a year ago. Although slightly lower than 74% of last quarter as some of the contracts matured by this quarter, we expect utilization to edge higher in 2H as new contracts in pipeline kick in.

China will be a big bonus. We always believe that this year will be a turn-around year for Tat Hong’s China business. However it seems that the turnaround is still ahead of our expectation. Revenue in China increased by 28% yoy in 1H, better than our expectation. Much-higher-than-expected utilization rate of 79.9% suggests robust demand. We expect Tat Hong’s China business to double its gross profit and make meaningful contribution to the group in FY3/13.

Strong BUY maintained. We continue to like Tat Hong’s multi-year growth story and reiterate our BUY call. We believe current valuation of 11.4x FY3/14 PE is not expensive for a 30% EPS growth company. We change our target price to SGD1.78 as we roll forward our valuation to FY3/14 and take into account the EPS dilution from recent placement.

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