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

Sin Heng Heavy Machinery

AmFraser Research, May 8

SIN Heng reported Q3 FY14 revenue of S$53.7 million, which was 33 per cent higher than the previous corresponding quarter and in line with our forecast. Reported Patmi (profit after tax and minority interests) at S$6.3 million witnessed a 106 per cent increased as compared with Q3 FY13.

Normalised earnings at S$3.6 million was 5 per cent higher than our forecast. We have previously advised investors to focus on normalised Patmi instead of reported Patmi, where the latter could be clouded by non-cash items such as forex gains/losses. This was seen in the previous quarter where reported Patmi came in at S$300,000 due to forex losses despite core operations remaining sound.

Sin Heng's rental business had been affected by the seasonally weaker Q3 due to events such as the Chinese New Year. However, its complementary trading business more than made up for the drop in its rental business. As a result, the group's overall gross profitability witnessed a 10.2 per cent increase from S$7.2 million in Q3 FY13 to S$7.9 million in Q3 FY14. Nine-month FY14 gross profit was also up 7.1 per cent to S$23.2 million when compared on a y-o-y basis.

The company continues to benefit from a weak yen, which makes Japanese-made cranes more affordable to its clients. This resulted in higher trading volumes of its cranes. We expect growth from this segment to be at least 10 per cent in the coming years as it penetrates high growth region such as Myanmar and Vietnam.

Its new distributorship to market Arcomet's self-erecting cranes in Singapore and other SEA (South-east Asia) countries will increase portfolio diversity of the company and help appeal to a wider range of customers.

Q4 FY14 is seasonally stronger. We expect Sin Heng's rental business to improve in Q4 which is the seasonally stronger quarter with a higher take-up rate from clients.

This will help to improve overall margins and profits.

Our normalised earnings forecast for FY14 and FY15 remains at S$15.1 million and S$18.1 million respectively. Based on 9.4x FY14 PE, which is the company's historical PE trading range, our fair value translates to S$0.250. Maintain "buy".

BUY

Sin Heng Heavy Machinery

AmFraser Research, Nov 19

SIN Heng is one of the leading heavy lifting service providers in Singapore, focusing on the mid- to high-lifting capacity segment. Its core business is in the renting and trading of cranes, aerial lifts and other heavy lifting equipment.

It is the only crane operator among its listed peers that is actively engaged in the trading business. The trading segment, despite being a lower margin business, requires less capital to operate.

It is also an additional income source and ensures that the company's rental fleet be kept young and its crane products relevant.

Sin Heng provides an indirect opportunity for investors to gain exposure to the growth of emerging countries, and is likely to be a beneficiary of the boom in the region's infrastructure spending, with its branded crane equipment already the leading standard in the infrastructure arena.

Synergistic effects could be achieved from the partnership with Toyota Tsusho Corporation (TTC), which also holds a 27 per cent stake in the company.

The yen depreciation in the past year has benefited Sin Heng in the form of lower purchase costs. High quality Japanese cranes are also now more cost-competitive relative to China-made ones. Buyers will be more receptive to purchase these cranes from suppliers like Sin Heng due to the narrower cost disparity.

Initiate "buy" with FV (fair value) S$0.300. We forecast earnings to grow at a CAGR (compounded annual growth rate) rate of 20 per cent from 2013-15.

On a valuation of 9.4X (5-year historical mean) FY14 PE, we derive a TP of S$0.300, representing a 50 per cent upside from current level inclusive of an expected dividend yield of 3.9 per cent.

BUY

Sin Heng Heavy Machinery

Kim Eng on 12 April

Background: Sin Heng Heavy Machinery provides heavy lifting solutions to customers in the infrastructure and geotechnical, construction, offshore and marine, and oil and gas industries. Its core business is in the rental and trading of cranes, aerial lifts and other heavy lifting equipment. As of FY Jun11, it has a rental fleet of 107 cranes and 149 aerial lifts, with total lifting capacity of 12,071 tons, spread out over Singapore, Malaysia and Vietnam.

Recent developments: Interest in the stock has spiked following the company’s recent announcement that it has entered into a joint venture in Myanmar to undertake heavy equipment leasing, rental, distribution and sales. Sin Heng has invested S$250,000 in this joint venture.

Myanmar never fails to excite. Since news of a potential liberalisation in Myanmar broke, companies with the slightest hint of association with the country never fail to excite. Without doubt, the construction sector would be one of the key sectors to benefit from this turn of events as infrastructure and property development would likely accelerate. There are foreseeable advantages in being an early mover in the country.

Drawing parallels to the Vietnam foray. Sin Heng ventured into Vietnam in 2009. It currently has offices in Hanoi and Ho Chi Minh City, where it is engaged in equipment rental business. In FY Jun11, Vietnam contributed about 3% of total revenue. It took Sin Heng about two years to achieve this level of revenue contribution from a developing country where tremendous opportunities and growth prospects beckon.

Still too early to get excited. The current excitement over Sin Heng’s Myanmar involvement may be a little premature. If its Vietnam investment is used as a gauge, it may take the company at least two years before it can see any positive results from its Myanmar investment. The stock currently trades at 14.5x FY Jun11 PER and 1.3x P/BV after the recent increase in share price.

Private equity share price overhang. Sin Heng’s major shareholder is a private equity player, SEAVI Advent, which owns a 39% stake at an effective cost of 19.9 cents per share. This may potentially create a share price
overhang.