Tat Hong Holdings

CIMB Research, July 8

TAT Hong's recent share-price weakness is reminiscent of its mid-April fall. But this time around, we believe sentiment is the cause. Its crane-rental division is still strong in all key markets, though there is some translation impact from its Australia-barricaded distribution division.

We conservatively lower our FY2014-16 EPS by 2-4 per cent for lower Australian contributions from Australian-dollar weakness. Accordingly, we lower our target price to $1.75, still at 11 times calendar year 2014 PE (its five-year average forward PE). Reiterate "outperform" with strong Asian operations still its main catalyst, while potential mergers and acquisitions could provide icing on the cake.

The broader market has pulled back from its May high and Tat Hong has not been spared, retreating 20 per cent in the last one month. As there have been no operational hiccups at the company, market sentiment and the overhang from AIF (Capital)'s voluntary conversion could be the culprits, in our opinion.

The slight negative aspect of its operations, if any, is currency-related via translation effects. Yet, we believe the dent on FY2014-15 numbers will only be 2.5-4 per cent, at the most, after speaking with management. This is not surprising, as in recent quarters, higher revenue contributions had been flowing in from Singapore and other Asean markets, at the expense of Australia. Contributions from Australia have been generally affected by weaker demand in the mining sector this year. We are sticking to our view that near-term earnings will increasingly be spurred by Singapore and other Asean markets (Thomson Line construction in Singapore in H2 2013, rail projects in Malaysia and Thailand) and Hong Kong.

We continue to believe that the group can achieve our forecasts for the next few years. Even without massive capital expenditure outlays, organic growth should be good, in our view, with efficient capital usage. The last four quarters had marked the start of a potential three-year boom, in all probability.

Accretive M&As could provide icing on the cake, further catapulting Tat Hong's growth.

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