Tat Hong Holdings - OCBC Investment 2016-07-13: Sector At Inexpensive Levels

TAT HONG HOLDINGS LTD T03.SI

Tat Hong Holdings - SECTOR AT INEXPENSIVE LEVELS

One of the latest indicators suggests that Australia’s construction sector could be seeing a general recovery. The Australian Performance of Construction Index (PCI) for Jun-16 had gained 6.5 points MoM to 53.2, reportedly the highest rate of expansion since Aug-15.
Meanwhile, Tat Hong’s Australian subsidiary Tutt Bryant Group has not been spared from increased competition amid a weak environment in Australia.
While the construction industry could be recovering, the contributions are still largely coming from the residential sub-sectors and the group ultimately has to win new projects, especially from non-residential sub-sectors.

As of the company’s latest announcement on 15 Jun, we understand discussions are still on-going regarding a potential transaction that may or may not lead to an acquisition of the issued share capital of the company.
We note that the crane rental industry has been facing a prolonged challenging period and local companies have seen a de-rating in valuations to inexpensive levels. Thus further consolidation may naturally occur in the sector.
Looking at the global crane industry, one of the latest M&A developments includes Austria’s Palfinger AG’s intention to make a takeover bid for Norwegian company TTS Group ASA at NOK5.60/share. This represents ~0.76x P/BV of the latter. For the local crane rental players (Tat Hong, Tiong Woon, Hiap Tong Corp, MS Holdings, Sin Heng), they are currently trading at an average of ~0.5x P/BV.

We reiterate that there is no certainty or assurance that the stated discussions will result in any transaction.
Notwithstanding the potential acquisition, we believe China remains the bright spot for the group as they continue their cost-saving measures, as well as clean up other non- core, unprofitable businesses.
We maintain our HOLD rating.
Our fair value is raised from S$0.50 to S$0.55 based on slightly higher 0.6x P/BV (previous: 0.55x) as we believe the group should command a certain premium to its peers.

Jodie Foo OCBC Securities | http://www.ocbcresearch.com/ 2016-07-13

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.55 Up 0.50