Tat Hong Holdings

OCBC on 3 Sept 2012

Since we upgraded our rating for Tat Hong Holdings (Tat Hong) to BUY (“Poised for a recovery”, 9/1/2012), the stock has risen by 34%, compared to STI’s 11% increase for the same period. The sharp run-up was mainly due to a strong recovery in Tat Hong’s crane rental business. Looking ahead, we believe that there is still plenty of upside, arising from higher rental rates and increased infrastructure activities. The recently announced S$18b Thomson Line project should also contribute positively to the construction activity in Singapore over the medium term horizon. Tat Hong’s business model has a significant operating leverage; and with rental and utilization rates likely to increase going forward, we believe the group is on track to deliver record profits for FY12-13F. Maintain BUY with unchanged S$1.39 fair value estimate.

More upside ahead!
Since we upgraded our rating for Tat Hong Holdings (Tat Hong) to BUY (“Poised for a recovery”, 9/1/2012), the stock has risen by 34%, compared to STI’s 11% increase for the same period. The sharp run-up was mainly due to a strong recovery in Tat Hong’s crane rental business. Looking ahead, we believe that there is still plenty of upside, arising from higher rental rates and increased infrastructure activities.

S$55b of transport projects
On 30/8/2012, Mr Lui Tuck Yew, Minister of Transport, announced plans for the new Thomson Line, which will be Singapore’s sixth MRT Line. The 30km long Thomson Line will have 22 stations and will open in three phases from 2019 to 2021. Total construction cost is estimated to be around S$18b. This development comes amidst a slew of recently announced projects, including the Downtown Line (S$20.7b; opening in stages from 2013 to 2017), the 7.5km Tuas West Extension (S$3.5b, ready in 2016) and the 21.5km North-South Expressway (S$7-8b; ready in 2020). In all, there is at least S$55b worth of transport projects lined up until 2021. With the expected increased in construction activity, we believe Tat Hong is well-positioned to benefit from a corresponding increase in crane rental rates.

Operating leverage
Being a crane rental company, a large portion of Tat Hong’s expenses are depreciation and financing costs relating to the hire-purchase of its crane assets. This means that beyond a certain point where revenue covers the overheads, any increase in rental rates or crane utilization will go straight to the bottom-line. This is exactly what is happening now – both the utilization and rental rates are trending upwards over the medium term and we expect Tat Hong to deliver record profits for FY12-13F. Maintain BUY with unchanged S$1.39 fair value estimate.