Sin Heng Heavy Machinery

AmFraser Research, May 8

SIN Heng reported Q3 FY14 revenue of S$53.7 million, which was 33 per cent higher than the previous corresponding quarter and in line with our forecast. Reported Patmi (profit after tax and minority interests) at S$6.3 million witnessed a 106 per cent increased as compared with Q3 FY13.

Normalised earnings at S$3.6 million was 5 per cent higher than our forecast. We have previously advised investors to focus on normalised Patmi instead of reported Patmi, where the latter could be clouded by non-cash items such as forex gains/losses. This was seen in the previous quarter where reported Patmi came in at S$300,000 due to forex losses despite core operations remaining sound.

Sin Heng's rental business had been affected by the seasonally weaker Q3 due to events such as the Chinese New Year. However, its complementary trading business more than made up for the drop in its rental business. As a result, the group's overall gross profitability witnessed a 10.2 per cent increase from S$7.2 million in Q3 FY13 to S$7.9 million in Q3 FY14. Nine-month FY14 gross profit was also up 7.1 per cent to S$23.2 million when compared on a y-o-y basis.

The company continues to benefit from a weak yen, which makes Japanese-made cranes more affordable to its clients. This resulted in higher trading volumes of its cranes. We expect growth from this segment to be at least 10 per cent in the coming years as it penetrates high growth region such as Myanmar and Vietnam.

Its new distributorship to market Arcomet's self-erecting cranes in Singapore and other SEA (South-east Asia) countries will increase portfolio diversity of the company and help appeal to a wider range of customers.

Q4 FY14 is seasonally stronger. We expect Sin Heng's rental business to improve in Q4 which is the seasonally stronger quarter with a higher take-up rate from clients.

This will help to improve overall margins and profits.

Our normalised earnings forecast for FY14 and FY15 remains at S$15.1 million and S$18.1 million respectively. Based on 9.4x FY14 PE, which is the company's historical PE trading range, our fair value translates to S$0.250. Maintain "buy".

BUY