Thursday, August 15, 2013

Tat Hong : Growth in TAT-ters down under (CIMB)

Tat Hong Holdings
Current S$1.09
Target S$1.18
Growth in TAT-ters down under

 This set of results is by far TAT’s worst showing in two years. Loads of issues have surfaced though they are pretty much out of TAT’s hands. While we do not think that the company has become altogether bad overnight, it does need to repair certain leaks in the house.

At only 8% of our FY13 estimate, 1QFY3/14 core profit was below our and consensus forecasts due largely to lower margins. We slash FY14-16 EPS by 18-41%, which lowers our target price (based on CY14 P/E of 11x, 5-year average forward P/E). We downgrade it from outperform to Neutral as uncertainties over its performance in Australia eclipse other growth engines.

Ugly set of results
The 1Q14 revenue drop of 18% yoy was a surprise. All divisions, except the tower crane rental segment, turned in lower revenue. Core profit plunged 65% yoy to S$7m, primarily due to margin pressure. Overall gross margin also deteriorated 2.8% pts yoy to 37.6%, with lower margins recorded for the tower crane rental and distribution arms. The culprits were (1) PT Worldwide Equipment in Indonesia, (2) crane relocation costs incurred in Australia for a new LNG project in Darwin, and (3) price competition and lower margins in Australia as the distribution division strived to move aged inventory and discontinued models.

Utilisation rate to ease
Management reassured us that stringent cost-cutting measures have been put in place and assets are being relocated to areas of higher demand. However, we see fit to adjust the FY14 blended utilisation rate from an average of 75% to 67% for crawler and mobile cranes.

Downgrade to Neutral
The near-term challenges will negate the better performance from the two crane rental divisions. We are not writing off TAT at this juncture as the business recovery in Australia is not off the picture but right now, its operating environment is hindering the spectacular growth that lifted the group’s performance in the past.

General equipment rental (Revenue -16% yoy)
The underperformance of general equipment rental was primarily attributable to a decline in equipment sales in Australia due to the slowdown of the general economy, a drop in demand in Singapore, especially from the marine sector and a reduction in excavator sales in Indonesia as weaker commodity prices and more cautious finance leasing by financial institutions to customers curbed demand.

This division is expected to underperform in FY14 due mainly to the slowdown in economic activities in Australia and reduced excavator sales in Indonesia as weak commodity prices dent demand.

Distribution(Revenue -28% yoy)
The distribution business also underperformed for the same reasons as the drags on general equipment rental – lower equipment sales in Australia, a decline in demand in Singapore and reduced excavator sales in Indonesia. We expect continuing weakness for this division due to these issues.

Tower crane rental (Revenue +6% yoy)
While the tower crane rental division is the smallest contributor to the group, it is the only bright spark in this set of results. The latest results show improved utilisation of its expanded fleet of tower cranes, thanks to the division's participation in infrastructure, power plant, power station and large commercial projects. In China, this division is expected to maintain its growth momentum as it continues to participate in more localised and sizeable infrastructure projects.

Crane rental (Revenue -14% yoy)
Contributing to the decline in crane rental were a fall in demand for specialised transport services and the relocation of cranes to Darwin for redeployment in a new LNG project in Australia, the completion of several major projects in Malaysia and the time lag in the redeployment of cranes to other projects in Thailand following the completion of the flood prevention barricade project in FY13. These were mitigated by an improved performance in 1) Singapore due to continued participation in the construction of chemical and LNG plants on Jurong Island, MRT Downtown Lines 1 and 2 projects, foundation work for housing projects and overseas rental to Papua New Guinea and in 2) Hong Kong due to its involvement in the development of large infrastructure projects including the Wan Chai bypass, XRL West Kowloon terminal station south phase and the Hong Kong-Macau-Zhuhai bridge projects.

The outlook for this division is not as negative as for some other segments since prospects for its key markets in Southeast Asia and Hong Kong remain favourable on the basis of committed contracts and near-term prospects in Australia are positive.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 13/08/13

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