Our recommendation to take profit on Tat Hong shares (“Time to take profit”, 26/6/2013) more than a month ago turned out to be timely. After eight quarters of strong performance, the group’s earnings appear to have peaked. In 1QFY14, revenue declined by 18% YoY to S$175m, while net profit halved to S$8.2m from the year-ago period. 1Q gross margin fell by 2.8ppt to 36.4% with weakness seen across almost every business segment. Although our estimates are already the most conservative on the street, the lacklustre 1Q results were still below our expectations. Therefore, we adjust our FY14-15F estimates downwards and expect the street to take even larger cuts. We lower our valuation peg to 9x (previously 11x) and FV to S$0.80 (previously S$1.31). Downgrade from HOLD to SELL.
1Q results below expectations
Our recommendation to take profit on Tat Hong shares (“Time to take profit”, 26/6/2013) more than a month ago turned out to be timely. After eight quarters of strong performance, the group’s earnings appear to have peaked. In 1QFY14, revenue declined by 18% YoY to S$175m, while net profit halved to S$8.2m from the year-ago period. 1Q gross margin fell by 2.8ppt to 36.4% with weakness seen across almost every business segment. Although our estimates are already the most conservative on the street, the lacklustre 1Q results were still below our expectations. Therefore, we adjust our FY14-15F estimates downwards and expect the street to take even larger cuts.
Weakness across all segments
For the Crane Rental division, revenue fell by 14% YoY to S$68.8m on (i) lower transport activities and phasing in of the LNG project in Australia, and (ii) completion of major projects in Malaysia and Thailand. This was partially mitigated by stronger performances from Singapore and Hong Kong. Revenue from Tower Crane operations improved 6% YoY to S$20.2m, but margins fell on higher labour, transportation and depreciation charges. Distribution revenue decreased by 28% to S$66m, mainly due to slower infrastructure activities in Australia and Indonesia. Lastly, the General Equipment Rental segment also turned in a weaker performance with revenue falling 16% YoY to S$20.5m, because of a general slowdown in civil construction and falling mining demand in Australia.
Downgrade to SELL
Over the medium term, we think that the slowdown in China’s economy and the recent credit crunch would lead to weaker crane demand in China and other resource-rich countries such as Australia and Indonesia. Therefore, we lower our valuation peg to 9x (previously 11x) and FV to S$0.80 (previously S$1.31). Downgrade from HOLD to SELL.
Our recommendation to take profit on Tat Hong shares (“Time to take profit”, 26/6/2013) more than a month ago turned out to be timely. After eight quarters of strong performance, the group’s earnings appear to have peaked. In 1QFY14, revenue declined by 18% YoY to S$175m, while net profit halved to S$8.2m from the year-ago period. 1Q gross margin fell by 2.8ppt to 36.4% with weakness seen across almost every business segment. Although our estimates are already the most conservative on the street, the lacklustre 1Q results were still below our expectations. Therefore, we adjust our FY14-15F estimates downwards and expect the street to take even larger cuts.
Weakness across all segments
For the Crane Rental division, revenue fell by 14% YoY to S$68.8m on (i) lower transport activities and phasing in of the LNG project in Australia, and (ii) completion of major projects in Malaysia and Thailand. This was partially mitigated by stronger performances from Singapore and Hong Kong. Revenue from Tower Crane operations improved 6% YoY to S$20.2m, but margins fell on higher labour, transportation and depreciation charges. Distribution revenue decreased by 28% to S$66m, mainly due to slower infrastructure activities in Australia and Indonesia. Lastly, the General Equipment Rental segment also turned in a weaker performance with revenue falling 16% YoY to S$20.5m, because of a general slowdown in civil construction and falling mining demand in Australia.
Downgrade to SELL
Over the medium term, we think that the slowdown in China’s economy and the recent credit crunch would lead to weaker crane demand in China and other resource-rich countries such as Australia and Indonesia. Therefore, we lower our valuation peg to 9x (previously 11x) and FV to S$0.80 (previously S$1.31). Downgrade from HOLD to SELL.
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