Tat Hong Holdings - OCBC Investment 2016-02-16: ‘Depressed’ performance for FY16 expected

Tat Hong Holdings - OCBC Investment 2016-02-16: Depressed performance for FY16 expected TAT HONG HOLDINGS LTD T03.SI 

Tat Hong Holdings: ‘Depressed’ performance for FY16 expected 

  • Outlook remains weak 
  • Push towards being leaner
  • Proposed spin-off process likely longer than expected 

Dragged by FX and exit cost obligations 

  • Tat Hong’s 3QFY16 revenue fell 19% YoY to S$124.8m as all divisions reported lower turnover, and overall gross profit margin (GPM) declined by 3.2ppt to 30.6% with all divisions except the Tower Crane Rental segment recording lower GPM. 
  • A net loss of S$6.7m was recorded vs. a net profit of S$4.5m in 3QFY15. 
  • FX losses of S$2.9m were incurred as RMBSGD depreciation had affected some of its loans taken up in Singapore. 
  • While the group has been winding down the excavator distribution business in Indonesia, exiting this business resulted in higher costs (such as severance packages) and bad debt provisions. 
  • We expect this drag to continue in 4Q, while the exit may likely conclude by this year. 

Few bright spots 

  • Crane Rental sales (-2.7% QoQ) were affected by the completion of projects in Australia, Malaysia and Thailand, while Indonesia recorded better contribution due to new customers. 
  • Overall estimated crane rental rate improved, possibly due to larger tonnage cranes being rented as well as more complicated projects being taken up. 
  • General Equipment Rental sales (-5.9% QoQ) was impacted by pricing pressures and lower Distribution sales (-21% QoQ) was a result of continued scaling down of excavator sales in Indonesia and generally tough conditions. 
  • The overall decline in GPM was due to higher outsourcing costs for Australia operations, lower utilisation rates, as well as sale of excavators and aged units at reduced margins. 
  • Tower Crane Rental segment was the only segment that saw better sales QoQ (+4.3%) as well as GPM, on the back of better utilisation rates. 

Outlook for key markets remains weak 

  • The group expects FY16 earnings to be ‘depressed’, which is largely mirrored by other industry peers. 
  • Our FY16 estimates have accounted for the pre-tax gain of S$9.5m on disposal of the property at 11 Gul Crescent, Singapore. 
  • As we lower our peg from 0.55x to 0.45x P/B to reflect the subdued outlook and continued losses, our fair value estimate decreased from S$0.56 to S$0.45. 
  • We maintain our HOLD rating. 
  • The proposed spin-off of the Tower Crane Rental segment on TWSE may offer some value for shareholders if approved, although the process is likely to take longer than expected.

Jodie Foo OCBC Securities | http://www.ocbcresearch.com/ 2016-02-16
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.45 Down 0.56