Wednesday, November 20, 2013

Sin Heng Heavy Machinery : Slow & Steady, Towards New Frontiers (Phillip)

Sin Heng Heavy Machinery
Closing price: 0.265
Target price: 0.21
Slow & Steady, Towards New Frontiers

 SHHM are actively growing their synergistic rental (63% GP) and trading (37% GP) business model in SEA being one of the largest buyers of Kobelco cranes, and are authorized dealers of Kato and Mighty cranes.

• 1Q14 net profit of S$3.79M (+14.6% y-y) increases probability to close the year on the higher side of our estimate of single digit FY14 earnings growth.

• Rental income slowdown due to project completions more than offset by good trading income growth.

• Recommend “Buy” rating with TP of S$0.265.

What is the news?
SHHM reported 1Q14 net profit attributable to shareholders of S$3.79 million. Net profit was higher 14.6% y-y, but lower q-q by 11.2% from a high base. Rental gross profit dropped slightly by14.8% due to completion of certain projects, but trading grew by 85.0% y-y based on activity in all regions. Management is cautiously optimistic as infrastructure activity in Singapore should pick up by FY14 end while they continue to drive business in their growth regions of Malaysia, Vietnam and Myanmar.

 How do we view this?
We continue to be positive as they managed y-y net profit improvement despite delays in certain projects in Singapore. The healthy trading contribution offsetting the slight rental decline this quarter increases the probability of mid single digit growth for FY14 as rental activity in Singapore should pick up closer to end FY14. We expect cautious growth of rental capacities and trading networks for FY14-15, with additional potential upside surprises if materialization of planned third world region projects to bid on occur in FY15 onward.

Investment Actions?
SHHM makes an excellent investment for patient investors looking for longer term gains (there is moderate growth) with limited downside (P/B near 1, and 90+% of their assets are monetizable!) We therefore recommend a “Buy” rating, with an TP of S$0.265, based on residual income valuations which also corresponds to undemanding target of EV/EBITDA of 4.86x peer average which is more than justified by SHHM’s regional growth potential, business mobilities in SEA, operational efficiencies due to synergistic trading/rental model and potential upside surprises via opportunities with TTC.

Quarterly Update:
Rentals slow but more than offset by Trading. Gross profit for rental decreased by 14.9% to $4.6m for 1Q 14 as compared to the prior year mainly due to lower revenue generation and increase in direct labor costs.
Gross profit from trading increased 85.0% to $3.4m as compared to the prior year, mainly due to higher volume of cranes sold and better contribution from aerial lifts.

Rental gross profit down 14.9% y-y, but margins and gross profit are showing q-q improvement. Revenue from rentals decreased by 5.3% to 412.4m in 1Q14 compared to prior year, mainly due to completion of some domestic projects. However, rental revenues are projected to improve this year as the domestic slowdown was expected due to project delays. We still expect a pickup by 4Q13 followed by moderate growth in FY15.

The Group registered net profit after tax of $3.8m for 1QFY2014, which was 14.6% higher than the corresponding year, mainly due to the net impact of the following:
• Higher gross profit
• Higher other operating income from servicing income and unrealized fair gain on forward currency contract
• Higher selling expenses and administrative expenses in line with the increase in revenue
• Lower finance costs mainly due to partial repayment of bank loans and finance leases.

Positive Merits for SHHM
We continue to have a positive outlook for SHHM as a longer term steady investment because of:
1) Favorable geographical macroeconomic position for growth
a. Trading Revenue should expand moderately. Majority of their trading revenue is in Asia, which is expected to have 7% GDP growth and >5% construction spending growth till 2018.
b. Rental Operations in favorable growth macro-environments. Main revenue generators for renting are in Singapore (73M non-current assets), Malaysia (23.5M), Myanmar (1.3M) and Vietnam (13M.). From 2013-2018, their governments are projected to increase construction spending per annum as follows: Singapore (3.5%), Malaysia (4.5%), Myanmar (5%), and Vietnam (6.7%). Furthermore, their operations in Malaysia, Myanmar and Vietnam are in younger less matured markets with potential for greater market penetration. More details are found in the “Outlook on Operating Regions” section found later.

2) Cranes are a Monetizable Asset. Unlike most capital equipment, cranes are easily sold and SHHM being lowly geared has the capacity capitalize on peaks (sell cranes at profit) and troughs (buy cranes at discount). For FY13, cranes (122.3M carrying cost) and aerial lifts (16.5M carrying cost) make up 83% of all PPE. This implies that 90%+ of their total assets are monetizable.

3) The Toyota Tsusho Corp potential. SHHM’s own conservative organic growth rate for their rental fleet based on history implies a mid single digit net income growth rate for FY14 and a low double digit for FY15. However, TTC’s construction project management arm is actively sourcing for construction projects in SEA. Any significant project win could potentially increase these SHHM’s revenue growth rates and open new markets.

4) Increased breadth and depth. This year, they have expanded their product offering with the inclusion of Mini-crawler cranes (Mighty Crane) as well as established an after-sales support and equipment sales center in Indonesia. This bodes well for sales.

Barring unforeseen circumstances, SHHM plans to continue leveraging on their enhanced strengths of an expanded fleet, wider distribution network and healthy financial position to reach for better returns.

Rental growth revenue is estimated to be low-mid single digit this year and improve to 13-20% in FY15 due to timing of available projects domestically and regionally. Barring any unforeseen circumstances, based on present survey of available and soon to be available project to bid on, the company is cautiously comfortable in growing their rental fleet. We feel their historical net capex growth of$ 20M+ is attainable for FY14 and FY15 since they have established regional footholds. Rental margins expected to decrease slightly due to wage inflation and setup costs, and improve as SHHM gets more established in their growth regions.

Trading revenue is estimated to increase by around mid single digits in FY14 and higher single digits in FY15 which is conservative taking their historical trading growth rates, and favorable construction climates of operating regions. Trading margins are expected to be constant around historical averages.

Taken together, this implies a mid single digit net income growth in FY14 and a mid double digit growth for FY15. This is barring downside surprises in the form of government delaying of infrastructure spending, main contractor risk, or unpredicted turning of macro-economic conditions. Upside surprises include potential opportunities working together in TTC projects or a faster resumption of domestic project delays.

Given that almost all of SHHM’s assets are monetizable, and they are in the process of growing their rental fleet, on a longer term basis, valuations are made using Residual Income Valuation with a fair value of SGD 0.265 which coincidently leads to a EV/EBITDA of 4.86x (peer average) which is more than justified by SHHM’s regional growth potential, business mobilities in SEA, operational efficiencies due to synergistic trading/rental model and potential upside surprises via opportunities with TTC.

Source/Extract/Excerpts/来源/转贴/摘录: Phillip-Research,
Publish date:18/11/13

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