Sell (from Buy)
Target price:SGD0.79 (from SGD1.80)
Avoid the Falling Knife; Cut to SELL
1QFY3/14 results significantly below expectation. Tat Hong reported a set of disappointing results. Revenue declined by 18% yoy to SGD175.5m and net profit dropped by 51% yoy to SGD8.2. First quarter net profit only accounts for 10% of our full-year number. The decline was broad-based with revenue down in almost all divisions except a marginal improvement in Tower Crane Rental. We suspect that Tat Hong could face tougher time going forward especially in Distribution and General Equipment Rental division. We cut our net profit forecast by 36/41/37% respectively for the next three years. Downgrade to SELL as we think the market will further de-rate the stock on a more bearish growth outlook. Our new target price is pegged to 10x FY3/14 PER.
Things not getting better soon in Australia. We understand that the 53% (or SGD14m) drop in profit before tax this quarter was mainly attributed to weak Australia that affected Tat Hong across the board. Australia accounts for over 40% of group revenue. We expect the weak performance there to continue at least until the general election in September. But even after the general election, we are not confident that the government spending on infrastructure and the overall economy can recover very soon.
Crane Rental surprisingly weak. Crane Rental division has been the most important growth driver for Tat Hong. However this division also posted a 14% drop in revenue, which is out of our expectation. Utilization rate also dropped to 65% from 74% a year ago. We lower our utilization and GP forecast for the next three years as we believe that challenging times could last for longer.
Expect a 28% EPS drop in FY3/14. We significantly cut our earnings forecast as we concern on the decline in both revenue and margins. Based on our new estimates, FY3/14 EPS could drop by 28% yoy.
Avoid the falling knife. The robust earnings rebound in the past two years has come to the end in our view. Post this quarter’s shocking results, we expect further de-rating in Tat Hong’s share price. We recommend investors to sell the stock as we see more downside risk in share price. Our new target price of SGD0.79 is pegged to 10x FY3/14 PER (previously 15x) on back of weaker growth outlook.
Publish date: 14/08/13