Tat Hong Holdings:
Fair value S$0.90
add: 12m dividend forecast S$0.04
versus: Current price S$0.92
No surprises in 2QFY14 results
Tat Hong’s 2QFY14 results remained weak as expected. Revenue fell 14.2% YoY to S$185.3m while operating profit declined by 33.9% to S$18.6m. Despite the poorer showing, management declared an interim dividend of 1 S cent vs. 1.5 S cents last year. Entering 2HFY14, we expect Tat Hong’s performance to stay weak. Its Australian operations are unlikely to produce any turnaround until early FY15 (at its earliest) as sentiment remains poor. Nonetheless, some positives from stability in Singapore, Hong Kong and China operations should help to cushion some of the declines. As the street had factored in expectations for a weakened performance, we should not see sustained selling pressure on the counter. Adjusting our forecasts downwards slightly, our fair value falls to S$0.90 (S$0.96 previously). Maintain HOLD.
Weak 2QFY14 results was expected
Tat Hong’s 2QFY1 results remained weak as deterioration in business activity in its key market of Australia caused revenue to fall 14.2% YoY to S$185.3m. Three out of its four operating segments – crane rentals, general equipment rentals and distribution – suffered from this drop-off and recorded double digit declines in revenue. Although management managed to keep a lid on operating expenses for the quarter with a S$2.7m improvement, the pace of revenue declines still forced operating margin to fall by 3ppt to 10.0% and operating profit to decline 33.9% to S$18.6m. Despite the poorer showing, management declared an interim dividend of 1 S cent (1.5 S cents last year).
More of the same for 2HFY14
As previously mentioned, we expect Tat Hong’s performance to stay weak for the remainder of FY14. The slowdown in general construction projects, lack of mining and infrastructure initiatives and time needed to convert improvement in business confidence into actual spending will see its Australian operations remaining subdued for 2HFY14. At its earliest, we only expect a recovery to occur by early FY15.
Some positives to take away
Nonetheless, we take comfort from some developments in 1HFY14. There was general stability in contributions from the Singapore, Hong Kong and Thailand markets where Tat Hong is involved in longer-term infrastructure projects (rail and road bypass projects). In addition, utilization rates for tower cranes in China improved by more than 3ppt to 76.2%, which should help to temper concerns over a possible slowdown. We remain hopeful for sustained improvement in tower crane utilization rates due to the longer lease terms.
The weak set of results should not surprise the street but we could still see some initial selling pressure on the counter. Adjusting our forecasts downwards slightly, our fair value falls to S$0.90 (S$0.96 previously). Maintain HOLD.
Publish date: 13/11/13