Tat Hong Holdings

OCBC on 14 Aug 2012

Tat Hong Holdings (Tat Hong)’s 1Q13 net profit attributable to shareholders tripled to S$16.7m (1Q12: S$5.5m) such that the quarter earnings formed 24% and 31% of ours and the street’s full year estimates. Revenue jumped by 36% YoY to S$215.3m and overall gross margin increased by nearly four percentage points to 39.2% on better pricing and higher utilization rates. Unlike a year ago when the group faced a cyclical weakness in construction activities, business disruptions from the Queensland floods and management issues with its China operations, Tat Hong is now making a strong comeback on the prospect of continued growth (from increased infrastructure spending) across the region. We maintain our BUY rating and further raise our fair value estimate to S$1.39 (previously S$1.21) on the improved earnings outlook.

1Q13 results within expectations
Tat Hong Holdings (Tat Hong)’s 1Q13 net profit attributable to shareholders tripled to S$16.7m (1Q12: S$5.5m) such that the quarter earnings formed 24% and 31% of ours and the street’s full year estimates. Revenue jumped by 36% YoY to S$215.3m, supported by robust growth across all business segments. Overall gross margin increased to 39.2% (1Q12: 35.3%) on better pricing and higher utilization rates.

Segmental review
The Crane Rental division showed the greatest improvement with 1Q revenue increasing 64% YoY to S$79.6m on the back of increased construction activities in the region. After the restructuring efforts, the Tower Crane division bounced back with 28% increase in 1Q revenue to S$19.1m, attributable mainly to an expanded fleet size and improved utilization rates. For the Distribution division, it recorded a 27% increase in 1Q revenue to S$92.1m on strong excavator demand in Indonesia and increased sales in Singapore and Queensland. Revenue from General Equipment Rental also increased 9% to S$24.5m, helped by strong construction activities in Australia.

Making a comeback
Unlike a year ago when the group faced a cyclical weakness in construction activities, business disruptions from the Queensland floods and management issues with its China operations, Tat Hong is now making a strong comeback. According to the management, the outlook for Australia is positive and there are good growth opportunities within its resources and infrastructure sectors. In Singapore, Hong Kong and other Southeast Asia countries, it notes that a slew of major infrastructural projects (i.e. MRT, housing, expressways) are also slated for commencement over the medium-term horizon.

Maintain BUY
We updated our model for 1Q13 results and raised our valuation peg to 11x (previously 10x) on the improved earnings outlook. This in turn raises our fair value to S$1.39 (previously S$1.21). Maintain BUY.