Tat Hong Holdings - DBS Vickers 2015-09-01: Negative Priced In. Upgrade to HOLD.


Negative Priced In. Upgrade to HOLD. 

  • We upgrade our stance from negative to neutral as we believe P/BV valuations of -2SD may have priced in earnings weakness, which is at a 7-year low since GFC. 
  • We are however not positive on the stock as 1Q16 earnings disappointed and revealed continued weaknesses in Australia and the Crane Rental segment. 
  • Our 0.5x P/BV valuation for the stock represents -2SD of its 7-year historical mean which we believe is conservative. 
  • We prefer to base our TP on book value given the earnings uncertainty. 

1Q16 core earnings below expectations. 

  • While headline net profit of S$2.8m (-53% y-o-y) was in line, TAT incurred a core loss of S$7m, which was below our estimate. Earnings were helped by one-off gains of S$10m from the sale of properties in Malaysia and Australia. 
  • Revenue (S$139m, -15% y-o-y) was down across all segments led by lower crawler/mobile segment. Margins were also lower (32.0%, -4.4% pts) on the back of lower crane rental rates, utilisation and competition. 

Australia could pick up. 

  • The RBA is expecting Australia’s GDP growth to pick up to > 3% after June 2016. The optimism stems from improving consumption growth, household demand, net exports exchange rate depreciation, labour market and low interest rate environment. 


  • We value Tat Hong at S$0.52 pegged to 0.5x P/BV. This represents -2SD of its mean and is similar to 2008-09 GFC levels. Since our downgrade, the stock has declined c.15%. 
  • At the current depressed P/BV valuations, we believe the stock could find some support. 
  • Upgrade to HOLD on limited downside. 

Key Risks to Our View: 

  • Earnings recovery risks. Soft business conditions could potentially drive delayed economic recovery and further earnings disappointment. But we believe depressed valuations have already priced in weak earnings.

Alfie YEO | http://www.dbsvickers.com/ DBS Securities 2015-09-01
HOLD Upgrade FULLY VALUED 0.52 Same 0.52