Sin Heng Heavy Machinery

Phillip Securities Research, Sept 3

SIN Heng Heavy Machinery (SHHM) announced its Q4 FY14 results on Aug 28, 2014.

Although rental activities slowed on the lag in new major project starts in Singapore, rental segment margins increased to 39.5 per cent from 33.8 per cent because of a concentration of higher tonnage cranes, and a drop of maintenance expenses because of an even younger fleet. This bodes well as activity is to pick up in H2 FY14.

On outlook, trading revenue from regional expansion has potential for light growth and we expect a stabilisation of rental top-line due to several big projects being available for bidding in 2nd half of 2014 including the Thomson line and Changi T4.

Taken together, we revise our low-teens FY15 earnings growth rate with the following: 4 per cent and 9 per cent increases in rental and trading revenues, leading to a +4 per cent adjusted earnings growth.

We shifted from a residual model methodology of valuation to a historical PE peg method because of the interrelated segment strategies utilised by SHHM. They partake of a certain region's crane demand activity via combinations of trading and renting, depending on their optimisation of earnings versus time and opportunity.

Hence, it is possible they can increase trading at the expense of rental or vice versa, depending on earnings optimisation. So not only can the rental fleet frequently change in size - making the use of their intrinsic worth in valuations difficult; their increase or decrease in a current period also may not be accurate estimators of gross profit growth. Hence, we find it preferable to use a pure earnings measure.

We maintain "accumulate", but with a lowered TP of S$0.225 on FY15 adjusted PE of 9.0x (which is their historical to reflect modelling a more conservative rental earnings growth rate).

We continue to be positive on SHHM because of: (1) Expected rental pickup in Singapore; (2) regional growth potential and business motilities in South-east Asia. We maintain an "accumulate" rating TP of S$0.225 based on FY15 adjusted PE of 9.0x, which is its historical average adj. PE. This implies an upside of 13.5 per cent including dividends.

Key upside/ downside risks: Further delays in Singapore infrastructure projects (MRT lines, Changi T4, Jurong Island facilities upgrading) later in the year will affect rental top-line.

Execution risks - the inability to realise top-line increases in revenue due to their relatively nascent regional expansion activities may drag net income due to increased expenses.

Any unexpected macro risk may adversely affect broad market sentiment, or delay regional construction activities, which will affect profitability. However, SHHM does benefit from growing their businesses in regions with higher-than-average committed government infrastructure spending as well as being in a favourable spot in the crane replacement cycle.

ACCUMULATE