Since our last upgrade on Tat Hong Holdings (“Poised for Recovery”, 9/1/2012), the group’s crane fleet grew by ~20% (in tonnage), utilization rate by 5 ppt and rental rates by an estimated 10-15%, resulting in a 66% jump in FY13 PATMI. In our view, the easy money has already been made. Investors who have heeded our call would have made 46% return in 1.5 years and should now consider taking some profit. Looking ahead, the macro environment looks increasingly uncertain with sluggish data points coming out of China. Tat Hong’s crane fleet expansion is also expected to slow after a 79% surge in crane tonnage over the past five years. Finally, there is a possible share overhang resulting from private equity AIF Capital’s conversion of convertible preference shares to 53.3m ordinary shares. Downgrade to HOLD with lower FV estimate of S$1.31 (previously S$1.75).
Easy money has already been made
Since our last upgrade on Tat Hong Holdings (“Poised for Recovery”, 9/1/2012), the group’s crane fleet grew by ~20% (in tonnage), utilization rate by 5 ppt and rental rates by an estimated 10-15%, resulting in a 66% jump in FY13 PATMI. In our view, the easy money has already been made. Investors who have heeded our call would have made 46% return in 1.5 years and now should consider taking some profit. Looking ahead, the macro environment looks increasingly uncertain with sluggish data points coming out of China. A prolonged slowdown in China’s economy could potentially lead lower crane rental demand in the country as well as weaker Australia sales due to more subdued mining activities.
Growth rate to moderate
Following a 79% surge in crane tonnage in the past five years, management believes it is time to slow down its fleet expansion. This would allow its net gearing to improve to a more sustainable level since rising to above 60% from 16% five years ago. Current crane utilization rates are around 70-74% (vs. maximum of 75-80%), implying limited potential upside. As such, we expect a slower FY14-15F PATMI CAGR of ~10%, compared to the 66% increase in FY13. We also think that the consensus PATMI CAGR estimate of 17% for FY14-15F is too high.
Possible share overhang
Finally, we note that AIF Capital now holds 53.3m ordinary shares (or about 8.4% stake) after converting its convertible preference shares that it invested in since 2009. As AIF Capital is mainly a private equity player, there is a possibility that it may dispose of the ordinary shares in the future. This implies a share overhang. In view of the above-mentioned points, we cut our FV estimate to S$1.31 (previously S$1.75) on lower PER peg of 11x (previously 15x). Downgrade to HOLD.
Since our last upgrade on Tat Hong Holdings (“Poised for Recovery”, 9/1/2012), the group’s crane fleet grew by ~20% (in tonnage), utilization rate by 5 ppt and rental rates by an estimated 10-15%, resulting in a 66% jump in FY13 PATMI. In our view, the easy money has already been made. Investors who have heeded our call would have made 46% return in 1.5 years and now should consider taking some profit. Looking ahead, the macro environment looks increasingly uncertain with sluggish data points coming out of China. A prolonged slowdown in China’s economy could potentially lead lower crane rental demand in the country as well as weaker Australia sales due to more subdued mining activities.
Growth rate to moderate
Following a 79% surge in crane tonnage in the past five years, management believes it is time to slow down its fleet expansion. This would allow its net gearing to improve to a more sustainable level since rising to above 60% from 16% five years ago. Current crane utilization rates are around 70-74% (vs. maximum of 75-80%), implying limited potential upside. As such, we expect a slower FY14-15F PATMI CAGR of ~10%, compared to the 66% increase in FY13. We also think that the consensus PATMI CAGR estimate of 17% for FY14-15F is too high.
Possible share overhang
Finally, we note that AIF Capital now holds 53.3m ordinary shares (or about 8.4% stake) after converting its convertible preference shares that it invested in since 2009. As AIF Capital is mainly a private equity player, there is a possibility that it may dispose of the ordinary shares in the future. This implies a share overhang. In view of the above-mentioned points, we cut our FV estimate to S$1.31 (previously S$1.75) on lower PER peg of 11x (previously 15x). Downgrade to HOLD.
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