Tat Hong Holdings

Kim Eng on 23 Jan 2013

2013 will be another good year. We maintain our view that Tat Hong is still in the middle of a multi-year growth cycle and 2013 will turn out to be another good year. Supported by growth in most of the markets it operates in, we expect utilisation and rental rates to continue to climb while group ROE is expected to recover to above 10% from the low of 4.5% in FY3/11. Tat Hong remains a conviction BUY in 2013.

Australian energy sector to fuel growth. Australia’s energy sector will be a major revenue driver. With new gas discoveries in North and West Australia, it is reasonable to expect the domestic LNG boom to last a few more years. Tat Hong will be a major beneficiary of this boom as it has been involved in Australia’s energy sector for many years and has forged cordial long-term relationships with many O&M companies. We expect such ties and Tat Hong’s good reputation to help secure meaningful contracts in the LNG space in 2013.

Regional infrastructure development remains in high gear. Many countries in the Asia Pacific are banking on infrastructure construction to pull their economies out of the doldrums. We believe that spending by the regional governments will remain high in the foreseeable future, thereby underscoring demand for Tat Hong’s equipments.

Additional growth could come from M&A in 2013. With sufficient cash in hand following the placement last year and buoyant demand for cranes, it makes sense for Tat Hong to make some meaningful M&A’s to speed up growth. We believe that such activities should be appreciated by shareholders because of the favorable valuation gap between Tat Hong and potential M&A target companies.
Investment theme and valuation. We continue to like Tat Hong’s multi-year growth story and reiterate our BUY call on the stock. For a company with a prospective EPS growth rate of 30% over the next three years, its current valuation of 11.9x FY3/14F PER is hardly expensive. We maintain our target price of SGD1.78, pegged to 14.5x FY3/14 PER.