Fair value S$0.96
add: 12m dividend forecast S$0.04
versus: Current price S$0.93
WEAKNESS ALREADY PRICED IN
• Better clarity on FY14/15 outlook
• Aussie operations to remain weak
• But other markets provide stability
Upgrade to HOLD
Following our recent discussion with Tat Hong’s management,
we are upgrading Tat Hong to HOLD and raise our valuation peg to 11x (previously 9x) and fair value estimate to S$0.96 (previously S$0.80). We feel that the stock has bottomed since the sell-off after its disappointing 1Q14 results, and that the street has adequately priced in its expectations for a weakened performance for the remainder of FY14.
FY14 likely to see drag from Aussie performance
As a recap, Tat Hong’s 1Q14 results suffered mainly from a decline in its Australian operations, which management attributed to i) election uncertainty, ii) slow down in general construction projects, and iii) temporary relocation of its cranes between projects. While the new Coalition government has promised to accelerate infrastructure spending to boost mining investment and increase internal connectivity (i.e. high speed rail), timing of the execution is still unknown and there also remains a time lag to convert improvement in business confidence into actual spending. That said, Tat Hong’s performance is likely to stay weak for the remainder of FY14, and a pickup in Australian operations should come by early FY15 instead.
Other markets remain stable
The performances of its other markets – Southeast Asia and Hong Kong – should remain stable in FY14 and provide some cushion for the group. In addition, preliminary assessments for construction expenditure in China indicate an increase in spending of between 8- 9% for 2014 through to 2017, which will help address concerns over a possible slowdown in the world’s second largest economy. Tat Hong continues to enjoy fairly high utilization rates of about 80% and longer lease terms for its tower cranes in China, and this relative stability will also help offset some of the weakness from its Australian business.
Publish date: 08/10/13