Hold (from Sell)
Share price: SGD1.00
Target price: SGD1.00 (from SGD0.79)
Too Early To Buy On Australia
Downturn to persist, too early to buy. We met with management to assess the outlook on the company’s respective markets. Tat Hong’s core market, Australia, is expected to remain weak on the back of a change in the country’s political leadership, while earnings from China are supported by reasonable growth from nuclear plant construction works. Historically, share price is dependent on Australia activities; therefore, until we see concrete beginnings on Australia’s infrastructure projects, we deem it too early to turn positive on Tat Hong just yet. We raise our TP to SGD1, pegged to 12.3x FY6/14F PER, in line with its 5-year mean and adjust our earnings forecasts by 2%. Upgrade to HOLD.
Australia remains weak near term, Coalition Party led policy direction could be the wildcard. While we expect earnings from Australia to remain weak, we find the overall commitment on infrastructure from the Coalition Party to be positive for Tat Hong. The party has committed approximately AUD20.4b to infrastructure projects; the question now is execution. We forecast a 8% drop in Tat Hong’s revenue from general equipment rental in FY6/14 as a halt in public works has been affecting the local construction sector, especially in Queensland and New South Wales. Catalysts to watch out for would be the start of infrastructure projects and possible signs of a revival in utilisation rates.
Improving China construction activities offer support. The weakness in Tat Hong’s FY6/14 earnings will be offset by crane rental revenues from ASEAN and China. With economic activity in China showing signs of bottoming out, this could support construction activities in China. This was validated from China’s September PMI rising to the highest since March.
Land divestments to mitigate earnings shortfall. Tat Hong is focused on cost-cutting measures to soften the impact of depreciation costs from recent crane purchases. We expect Tat Hong to consolidate some operations in Singapore and move into Iskandar. It has secured a 22-year lease from JTC for a 16,100sqm plot in Tuas, which would allow its 11 Gul Crescent site to be divested through a public tender by Mar 2014. We estimate it could book in around SGD20-25m from this.
Too early to BUY, though downside supported by 0.8x historical book. Since our downgrade to SELL from 1QF6/14 disappointing results, Tat Hong has fallen 16%, which we think reflects the abrupt slowdown in infrastructure works in Australia. Upgrade to HOLD, for we think the share price will find support at this level, given it trades in-line with its 5-year historical P/B of 0.8x.
Australia looking more positive
Coalition Party emphasises infrastructure works. The Coalition Party has placed a heavier emphasis on developing infrastructure, mainly roads. The party has committed to over AUD20b worth of funding into infrastructure works. We believe the start of any three infrastructure projects – Bruce Highway, Pacific Highway and West Connex Highway – will be positive for Tat Hong.
Waiting for multiplier projects to start. Management indicated that earnings from Australia are likely to deteriorate until December 2013 (3QFY6/14) at least. We expect general construction works to depend on the timeline of the infrastructure projects, namely Pacific Highway in NSW and Bruce Highway in Queensland. Australia accounts for 43% of
Tat Hong’s revenue as of 1QFY6/14, versus 47.5% in 1QFY6/13.
Potential near-term property divestments
Singapore properties to mitigate lower crane rental rates. Tat Hong will be divesting 11 Gul Crescent as part of its optimisation programme to mitigate the impact on lower crane rental utilisation rates. The site at 11 Gul Crescent was acquired in 1981 on a 30+30 year lease and comprises 29,384sqm of land with a 1.4x plot ratio. Tat Hong will move its operations to Tuas South Street, where it has secured a 22-year lease from JTC for a 16,100sqm plot.
Sale of Gul Crescent would realize SGD20-25m net gain. Using recent JTC sales of B2 industrial land as a gauge, we estimate that Tat Hong could sell the site for SGD39-44m, based on SGD90-100psf, which implies a potential net gain of SGD20.2-25.5m. According to management, Tat Hong still has five other sites in Singapore with remaining leases of between 2 and 11 years, a couple more of which will likely be divested this year.
Publish date: 25/09/13