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Investor CentralTat Hong Holdings Ltd - MANAGEMENT REPLY: Should bond holders worry over liquidity & long term debt?
30/11/2013 – Tat Hong Holdings' 5-year S$100 mln bond issue shortly before disappointing Q1 results has raised the concern of at least one investor, who has contacted Investor Central.
And Q2 results, just released, give investors little to cheer about.
The investor says he bought the bonds shortly before Q1 results were published, and has now had difficulty selling them because of the illiquid market.
The notes pay a coupon rate of 4.5%, down from 4.75% during marketing, with a quarter of the proceeds being used to retire debt.
On page 4 of its Q2 results Tat Hong said that as at November 13, 2013, S$59.6 mln of the S$100 mln raised had been used as follows:
1. S$18.9 mln for inventory purchases
2. S$14.7 mln for capital expenditure on equipment, land and building
3. S$26 mln for refinancing of existing borrowings
We covered the company's Q1 financials in our earlierstory.
EARNINGS REVIEW
Sluggish markets like Australia, Indonesia, and lower demand from projects completed in Malaysia and Papua New Guinea resulted in Q2 numbers looking little better:
Revenue: -14.2% to S$185.3 mln
Profit: -51% to S$9.5 mln
Cash flow from operations: (S$15.9 mln) vs (S$30.1 mln)
Cash reserves: S$74.5 mln vs S$115.6 mln
Dividend: 1 cent vs 1.5 cents
Revenue declined because of lower distribution and crane rental revenue, mitigating project revenue.
Distribution revenue fell 16.5% because of lower sales in Australia, Indonesia and Singapore.
This is likely to continue, says Tat Hong.
Crane rental revenue fell 13.6% because of subdued mining and infrastructure activities in Australia, reduced demand for barges and cranes for a Malaysian projected which completed end FY13.
These were mitigated by positive contributions from projects underway in Singapore, Hong Kong and Thailand.
In its outlook, the Group said its crane rental business is expected to contribute in the second half of fiscal 2014 because of projects in major markets, excluding East Malaysia and Papua New Guinea because projects have completed there.
General Equipment Rental revenue also dropped 33% because of the slowdown in mining and civil construction sectors in Australia.
Only the Tower Crane business showed a positive contribution by climbing 20.2% because of the company's larger fleet size that had higher utilisation rates and continued participation in projects in China.
The tower crane rental business should maintain growth as well with concurrent projects and new opportunities from China in commercial building, infrastructure, transportation and power generation.
Other details from the Q2 results: as at September 30, 2013, net book value of property, plant and equipment increased by S$39.5 mln because the company bought more cranes, property and capitalised building costs.
Inventories decreased by S$12.1 mln because it was more cautious in purchasing.
Collecting on outstanding debts improved to reduce trade and other receivables by S$9.2 mln.
Total distribution expenses reduced by S$1.4 mln due to a net write-back of S$841,000 in allowance for doubtful debt.
ANALYST CALLS
Analysts were generally neutral on the stock issuing HOLD calls with slightly differing price targets.
OCBC Research and DBS Vickers Research in cursory reviews said weak second quarter was expected for and its Australian operations are unlikely to contribute until early FY15 at the best.
OCBC has its target price at S$0.90 but DBS Vickers set its higher at S$1.01.
CIMB Equity Research also pointed to how poor Australian operations will eclipse other revenue contributions, though it observed the positive in the 20% increase in Tower Crane Rental coming from Singapore, Thailand and Hong Kong.
It has a target price of S$0.93.
Net asset value in the Q2 results is S$1.04 per share.
The company's stock price as at November 22, 2013 closed at S$0.90, falling from S$1.52 six months ago on May 22.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
1. Should bond holders worry over liquidity and long term debt?
Net gearing was 0.85 times, with total financial liabilities increasing by S$63.4 mln from the issuance of the S$100 mln fixed rate notes, offset by S$37 mln in repayment of loans and hire purchase finance.
Debt stood at S$577 mln, of which S$183.6 mln is repayable within one year or less or on demand.
Management reply: There is no issue concerning the Group’s liquidity or long-term debt as historically the Group has managed its cashflows well and it has access to other funding options including available banking facilities.
2. What is the strategy to repay the immediate outstanding amount of S$183.6 mln?
Tat Hong has already spent S$26 mln of capital raised from S$100 mln notes.
It has S$74.5 mln in cash, down from S$115.6 mln.
That leaves S$83.1 mln due if both reserves and cash from notes are utilised for this repayment.
How will it finance this?
Management reply: For the S$183 million debt due within the next 12 months, the Company intends to repay these using its cashflows and revolving bank loans. It must also be noted that the Company has a strong cash position of S$74.6 million as at 30 September 2013.
3. What are its comments on the concerns of the investor?
In particular, the lack of liquidity in the market for its bonds.
The investor also questions whether SGX should have checked on the company's financial health in consideration to allow it to deal out debt securities like notes.
The SGX announcement of the S$100 mln notes issue published on July 31, says (second-last paragraph): "Such approval and admission to the Official List of the SGX-ST and quotation of the Notes on the SGX-ST is not to be taken as an indication of the merits of the Issuer, its subsidiaries, its associated companies, the Programme or such Notes."
In Chapter 3 Debt Securities of the SGX Rulebook, Rule 306 states that an issuer "must release reports and/or financial results required within the period specified".
Rule 308(8)(c) specifies that "the directors of the issuer must prepare a report that relates to each quarter and lodge it with the trustee within one month of the end of the period".
In this instance of Tat Hong's notes programme, the marketing commenced on July 24, 2013 via an announcement on SGXNET, which was 20 days prior to the Q1FY14 results publication on August 13, and 7 days prior to successful listing on the SGX on July 31.
In Rule 310, the issuer (Tat Hong Holdings) is required to provide a prospectus, offering memorandum or introductory document, "in final form" to the SGX for the application to list the notes.
Among the required supporting documents (as specified in Rule 314) to this prospectus, is the "auditor's report to management on the internal control and accounting system of the issuer and its principal subsidiaries".
Management reply: The Company’s bonds are traded “OTC” to accredited investors who normally take a long-term view which is the nature of bond investments. Tat Hong has no control over the liquidity of the bond market. It will be able to meet its obligations to its bond holders whether be it in the interests due on a half-yearly basis or the repayment of the principal sum upon the maturity of the bond in July 2018.
(Total number of questions in the full story: 19)
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