Tat Hong Holdings

UOBKayhian on 22 Nov 2012

Valuation
·          Tat Hong (TH) is trading at 10.7x FY13F PE based on Bloomberg’s consensus estimates with a dividend yield of 2.3%.
·          Share price catalysts include an improvement in margins, utilisation rates and strong quarterly earnings for the next two years. With the new funding in place, TH should be looking to expand its fleet of mobile and tower cranes. The company placed out 70m shares at S$1.20/share in Sep 12. 
Investment Highlights
·          Recovery from slump. The group went through a rough patch in FY11 with earnings falling drastically as its Australian operations were hit by floods, keen competition had eroded margins and TH had to take a S$6.9m impairment provision for its investment in China. Net profit fell 33% yoy to S$26.0m from S$38.6m in FY11, a far cry from the record earnings of S$89.8m in FY08. However, net profit has resumed an uptrend with 1HFY13 net profit escalating more 87.9% yoy to S$38.4m.
·          Construction boom provides earnings visibility. Heavy equipment owners like TH will benefit from the construction boom more than main contractors, according to several channel checks. As the government rolls out infrastructure projects such as Thomson Line MRT, North-South Expressway and HDB projects concurrently, it will inevitably squeeze limited resources and increase cost pressure. According to management, TH has cranes booked for the next 18 months, which is likely to increase utilisation rates and improve margins. Rental rates have also improved 15% from the trough in 2008.
·          Increasing fleet size to cater for stronger demand. The company will be looking to expand its existing fleet by 40-50 cranes, with capex for the next financial year budgeted at S$70m-80m. We estimate TH can recover its investment in less than four years after incorporating depreciation, maintenance and other operating costs. Utilisation rates have improved from about 60% in 2008 to the maximum 75-80%.
1HFY13 Results
·          Revenue grew 26% yoy to S$431.3m in 1HFY13, driven by stronger demand from all its business segments. Gross margin improved by 2.0ppt to 38.2% with gross profit jumping 33.1% yoy to S$164.8m, mainly attributable to higher rentals and utilisation rates from both the crawler/ mobile crane rental and tower crane rental divisions.
·          However, operating costs rose 26.6% yoy to S$111.8m from higher administrative expenses, distribution costs and an unrealised net forex loss of S$8.5m. Net profit increased 87.9% yoy to S$38.4m from S$20.4m in 1HFY12.