Wednesday, November 6, 2013

Sin Heng: Steady improvement (Phillip)

Sin Heng Heavy Machinery
Target Price (SGD) 0.27
Closing Price (SGD) 0.22
Steady improvement, Single-digit FY14 earnings estimate

 SHHM is an efficient provider of cranes and heavy lifting equipment. They are actively implementing and growing their synergistic rental and trading 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.
• Slowdown in rental income due to completion of projects more than offset by good trading income growth.
• Maintain ”Trading buy” rating with unchanged TP of S$0.27.

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 offset rental decline this quarter increases the probability of high single digit growth for FY14 as rental activity in Singapore should pick up closer to end FY14. We expect cautious growth of rental capacities for FY14-15, with potential upside surprises if materialization of panned projects to bid on in the third world regions occur in FY15 onward.

Investment Actions?
We continue to like SHHM due to 1) PE of 8.8x under peer average of 9.3x with significantly less leverage 2) EV/EBITDA of 4.0x under peer average of 4.8x. We therefore maintain our “Trading Buy” rating, with an unchanged TP of S$0.27, based on undemanding target of EV/EBITDA of 4.95x which is a tad higher than peer average justified by regional growth potential, business mobilities in SEA and operational efficiencies due to synergistic trading/rental model.

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.

Rental Revenues are projected to improve this year: The domestic slowdown was expected due to project delays and a normalization of the 4Q13 revenue spike. 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 Outlook for SHHM
We continue to have a positive longer term outlook for SHHM because of:
1) A synergistic rental/trading model coupled with a healthy balance sheet. This allows them to effectively maintain a younger (<5 a="" activities="" after="" apart="" as="" by="" construction="" countries="" developed="" developers="" fleet="" from="" highly="" in="" nbsp="" p="" participate="" region="" renting.="" s="" sought="" well="" yrs="">2) Business mobility. SHHM has demonstrated how effectively they can mobilize their fleet, boasting of utilization rates of about 90%. The moderate size of their rental fleet actually allows easier mobilization to regions of greater activity if needed.
3) Regional growth potential. Not only are SHHM’s trading networks one of the largest in Asia, they have positioned themselves physically in regions that are poised to growth this decade. We see this strategic placement as very important in the longer term for the company. An overview of economic/construction climate follows next.

Asia Overview
The economic fundamentals in Asia remain robust, if slightly muted. AECOM estimates GDP growth is forecast to be around 7% per pa, the fastest growing region in the world, through to the rest of 2020. Over the longer term, domestic demand will be fueled by a growing middle class and rising real income rates.

Outlook on Operating Regions
Singapore has a stable pipeline of infrastructure projects. BCA expects construction spending to be between S$26B to $32B this year, spurred by large public sector projects such as public housing and infrastructure works like the Thompson MRT line. AECOM estimates construction expenditure to increase 3.5% pa over the next five years though spending growth is slowing down.

Opportunities abound in Malaysia. The Malaysian construction industry is expected to sustain growth driven partly by long-term infrastructure projects, as well as mass affordable housing schemes and economic development corridor programs in peninsular and east Malaysia. Last year, US$17.6B was spent on construction and AECOM is forecasted growth of 4.5% pa over the next five years.

Indonesia’s construction market is significant in size and growth. Construction spending in Indonesia accounted for more than a quarter of the country’s GDP in 2012 at US$183.8B. AECOM forecasts growth prospects to 5% pa till 2018. The Indonesian government has said infrastructure improvement will be a priority over the medium term, particularly transport, including highways, ports and airports. A potential hiccup is that as a result of the upcoming presidential election in 2014 there may be some slowdown in federal-driven projects. However, many initiatives in Jakarta are led by the city itself and the elections are not expected to have a major impact.

Vietnam’s construction market, while of limited size, is set for above average growth rates through to the end of the decade. Construction spending in 2012 was some US$18.6Bm which accounted for roughly 20% of the country’s GDP. Spending is forecast to grow to 7% pa over the next five years. It is also worth noting that SHHM are utilizing their competitive advantage by actively pursuing ODA (Official Development Assistance) jobs that have Japanese main contractors, to play on their TTC strategic partner strength.

Myanmar’s many infrastructure projects are at planning phase but SHHM is in prime position as a first mover when these projects materialize more next year than this year.

Key risk
Downside risk includes unexpected macro economic instability in operating regions that may delay government construction expenditure. In addition, As SHHM continues to push into growth regions in Malaysia, Vietnam and Myanmar, one-time transportation and set up costs may put a temporary drag on margins.

Upside risk include faster materialization of potential mega projects in growth regions like Vietnam and Myanmar that are in the preliminary stages of their infrastructure and construction planning phase. Furthermore, their strategic partnership with TTC may allow penetration to other markets.

Source/Extract/Excerpts/来源/转贴/摘录: Phillip-Research,
Publish date:04//11/13

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