TAT HONG HOLDINGS LTD

UOBKayhian on 18 June 2015

 (TAT SP) China’s Tower Crane Business Driving The Company
VALUATION

• Tat Hong (TAT) is trading at 0.5x FY15 P/B and 66.9x FY15 PE. 

FINANCIAL HIGHLIGHTS 

• FY15 net profit fell 85.1% to S$4.9m mainly due to non-cash goodwill impairment of S$30.8m on its Australian entities. Excluding the impairments, core net profit would have been S$35.7m, similar to the S$35.8m achieved in FY14. Revenue fell 11% yoy to S$608.6m as all business segments except tower crane operations booked lower income. Revenue from crane rental business fell 9% yoy to S$237.6m due to the completion of several projects in Singapore and Australia. Tower crane rental business racked up a 8% yoy growth in revenue to S$96.6m as a result of continued participation in infrastructure, large commercial and power plants projects. Gross profit fell 14% to S$212.1m and gross profit margin deteriorated 1.1% to 34.8% (FY14: 35.9%), attributable to lower utilisation rates, higher provision for stock obsolescence and crane repositioning costs incurred in Australia. 
• Year of balance sheet strengthening. Tat Hong managed to unlock S$89.1m in FY15 from the disposal of properties and equipment and from the divestment of noncore assets. After repaying loans and other financial obligations, net gearing declined to 0.77x, down from 0.87x a year earlier. The company also generated a strong free cash flow of S$115.1m which grew its cash and cash equivalents to S$93.3m as compared with S$58.6m in FY14. 

OUR VIEW

• Headwinds likely to continue in Australia. We expect the weakness in the Australia market to impact performances of the crane rental, general equipment and distribution businesses going forward. According to the Australian Government’s update on the Resources and Energy Projects, the downturn in commodity prices may cause mining companies to reduce exploration and capital development expenditure. With the recent completion of the two large LNG projects in Queensland, collectively worth AUD$39b, the value of committed projects is also set to decline as new projects are being increasingly delayed due to adverse market conditions. 
• China could be the only bright spot. The Chinese government is likely to increase infrastructure investment to spur the economy and thus drive demand for Tat Hong’s tower cranes. This is the only segment that achieved revenue growth in FY15 (8% yoy) and saw a doubling of reportable segmental profit of S$22.1m in FY15 as compared with S$10.6m in FY14. Tat Hong also added 25 new tower cranes in the year to 934 units and to 188,399 tonne-metres.
• Announced a spin-off of its China tower crane business Although it remains at an exploratory stage, Tat Hong believe that the listing of the business on an approved exchange will provide access to additional source of funding to capitalise on growth opportunities in China.