Tat Hong Holdings Ltd - MANAGEMENT REPLY: Can Tat Hong improve its earnings from Australia?

22/2/2014 – Tat Hong is expecting its profit for FY14 to be significantly lower than FY13.

It may not be able to rent out its cranes as the projects in Malaysia and Papua New Guinea are completed. [The company disagrees with that this is the case. Please see their reply below. Ed.]

The distribution division is expected to underperform due to reduced excavator sales in Indonesia and lower demand in Singapore.

However, the tower crane rental division is expected to maintain its growth momentum in FY14.

This is due to the on-going projects and new opportunities in China.

The general equipment division is expected to turn in a weak performance as flat market conditions in Australia continue to prevail.

The Australian economy is weak and so the resources sector has also slowed down.

Brokers want to still wait for Tat Hong's fundamentals to turn positive before reviewing their calls.

So, DBS Vickers Research says the stock is FULLY VALUED at S$0.785.

CIMB Research and OCBC Research have a HOLD rating with a fair value of S$0.78 and S$0.72 respectively.

The company just announced earnings for Q3 FY14:

Revenue: -19% to S$167.4 mln
Gross profit: -23.9% to S$56.3 mln
Gross margin: 33.6% vs 35.9%
Profit: -32% to S$12.1 mln
One-off gains/losses: S$12.9 mln vs Nil
Cash flow from operations: S$49.6 mln vs S$12.4 mln

All its divisions underperformed except for the tower crane rental segment, which saw revenue growth of 23% to S$23.7 mln.

The group recorded an increase of 186.2% in its other income to S$14.9 mln attributable to the gain of S$12.9 mln from sale of its industrial land in Iskandar, Malaysia.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Can Tat Hong improve its earnings from Australia?

Tat Hong is highly dependent on Australia, which contributed 48.4% to total revenue in Q3.

The crane and equipment rental business was impacted by weak public spending and slower progress in oil & gas projects.

Its earnings have been affected by the slowdown in Australia since Q4 FY13.

In addition, OCBC Research says the Australian government is giving priority to fixing the A$47 bln budget shortfall in the current fiscal year.

Austerity dampens fiscal spending, which infrastructure projects fall into.

However, if the upcoming budget is in favour of infrastructure spending, it thinks Tat Hong will benefit in FY15.

Management Reply: We agree with the comments below. The reinstatement of spending on infrastructure maintenance work by the Australian Government would also benefit Tat Hong’s general equipment rental division.

Question

2. How does it plan to improve gross margin for its tower crane rental segment?

Revenue from tower crane rental division increased 23% to S$23.7 mln due to high utilisation rate.

But its gross margin seems to be on a declining trend with 19.8% reported in Q3.

Given below is the snapshot of gross margin trend from its Q3 presentation.

This raises another question.

(Total number of questions in the full story: 6)

We thank management for its response

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