Tuesday, October 29, 2013

Tat Hong : Bring forth the Trojan horse (CIMB)

Tat Hong Holdings
Current S$0.95
Target S$1.08
Bring forth the Trojan horse
 TAT has unveiled its other business opportunity: unlocking its dormant real estate bank in Malaysia. However, we see the move to develop its plot of Iskandar land as a deviation from its core business. Regardless of the outcome, this corporate action is unsettling.


While earnings estimates are unchanged, we now lower our CY14 P/E target to 9x, 1 s.d. below its 5-year average forward P/E(previously at parity at 11x),to reflect this off-the-mark business decision. Maintain Neutral as uncertainties over its performance in Australia will eclipse other growth engines.

What Happened
TAThas announced that it has entered into a shareholders’ agreement with various parties to jointly undertake mixed property development in Iskandar Malaysia. TAT has a 25% stake in the JV company. TAT is to take over the completion of the purchase of five parcels of vacant industrial land totalling 1,074,500 sqft (“Iskandar Land A”). With its JV partners, TAT says it wants to bring about future value creation through the development of Iskandar Land A.

What We Think
The original intended purpose of Iskandar Land A is the storage of its cranes and inventories and we are surprised that TAT says that it is now incompatible with the general land use in the Nusajaya area. The company says the recent appreciation in the market value of Iskandar Land A has rendered it expensive for use as a depot for crane storage. We disagree with this move and do not buy its story of value creation through property development. This latest move appears to be a logical action to optimise a dormant piece of real estate but it (1) does not remedy TAT’s slower growth,(2) implies that some form of crane warehousing will still be in land-scarce Singapore, and (3) presents the more serious issue of deviating from its core business.

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


Background
TAT has announced that its wholly-owned subsidiary, Tat Hong International Pte Ltd (“THI”),has entered into a shareholders’ agreement (“shareholders’ agreement”) with AME Land Sdn Bhd (“AME”), BP Lands Sdn Bhd (”BP Lands”) and L&M Ground Engineering Sdn Bhd (“L&M”), collectively the “JV Partners”, in relation to Tat Hong Industrial Properties Sdn Bhd, to jointly undertake mixed property development in Iskandar Malaysia.

Land acquisition
For the purpose of acquiring land for development, the JV company will enter into an assignment cum nomination of purchase rights agreement (“ANPR agreement”) with (A) Tat Hong Heavy Equipment (Pte) Ltd (THHE), a wholly-owned subsidiary of the company, to take over the completion of the purchase of five parcels of vacant industrial land totalling 24.667 acres, approximately 1,074,500 sq ft (“Iskandar Land A”), under the sale and purchase agreement (“SPA”) dated 22 April 2011 that THHE had entered into with UEM Land Bhd (“UEM”) as vendorof Iskandar Land A, and(B)L&M to take over the completion of the purchase of one parcel of vacant industrial land adjoining Iskandar Land A of 4.835 acres, approximately 210,600 sq ft (“Iskandar Land B”), under the SPA dated 29 April 2011 that L&M had entered into with UEM as vendor of Iskandar Land B.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 27/10/13

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