Tat Hong Holdings Ltd - MANAGEMENT REPLY: Can Tower Crane Rental hold up when almost everything else is heading down – which of the brokers is right?

3/9/2013 – Analysts have cut their calls and price targets on Tat Hong Holdings after reporting bleak Q1 results.

They say it can't get any worse, with the only optimistic comments relate to its crane rental business – the smallest contributor.

These are the company's unaudited Q1FY14 financials published on August 13:

Revenue: -18% to S$175.5 mln
Net Profit: -52% to S$9.2 mln
Cash flow from operations: S$33.3 mln vs S$29.8 mln
Cash Reserves: S$57.7 mln vs S$65.8 mln

Revenue dipped because of poor performances in the Distribution, Crane Rental, and General Equipment Rental divisions.

Distribution revenue declined as a result of lower equipment sales in an underperforming Australian market; lower sales of excavators to Indonesian commodity farmers as weak commodity prices impact demand; and lower sales from Singapore arising from the marine sector.

Crane Rental revenue declined because of reduced specialised transport services in Australia and the relocation of cranes to Darwin for the Ichthys LNG project; the completion of several projects in Malaysia; and time lags in redeploying cranes used in completing the flood barricade project in Thailand to Ichthys in Darwin.

But these were cushioned by higher revenue from the construction of chemical and LNG plants on Jurong Island, MRT Downtown Line 1 and 2 projects and foundation jobs for construction projects in Singapore; rental of cranes to overseas markets, primarily Papua New Guinea; and Hong Kong infrastructure projects like the Wan Chai By-pass, XRL West Kowloon Terminal Station South Phase and the Hong Kong-Macau-Zhuhai Bridge.

General Equipment Rental revenue declined as a result of competition and weak demand from the mining sector in Australia's Hunter Valley and Queensland; a general slowdown in the civil construction sector; and wet weather in Victoria, Australia.

In addition, the previous year had a revenue boost from flood repair projects.

Tower Crane revenue climbed by 5.8% or S$20.2 mln – the only segment to produce positive results due to a larger fleet size coupled with improved utilisation rates and continued participation in infrastructure, large commercial and power plant/station projects in China.

Question

1. Will this division continue to hold up?

The total revenue decrease is also reflected in a drop in the Group's gross profit margin to 36.4% from 39.2% last year.

Net profit of the Tutt Bryant Group in Australia had a significant decline.

PT Worldwide Equipment, an Indonesian marine equipment and services company, also sustained significant losses, without giving details.

Question

2. What is it doing to turn this around?

Management reply: The decline in profits from Australia was due to the slowing economy and the fact that many customers witheld equipment purchases in view of the coming federal elections on 7 September 2013. Immediate action has taken to cut costs and freeze capex. We have also relocated cranes to the Darwin area where they have secured employment on the new LNG project.

Where PT WWE is concerned, the losses were due to cost over-runs in relation to a project which has since completed. The Group has already reduced its headcount in PT WWE and implemented a more rigorous project management framework. PT WWE has also stepped up its marketing efforts to seek new market segments and customers for its services.

Other income climbed 71.4% to S$5.2 mln due to a higher gain from the disposal of fixed assets.

Total operating expenses dropped 7.6% to S$52.4 mln mainly due to reductions in total distribution expenses (-13.2%) and other operating expenses (-11.1%).

The reduction in total distribution expenses comes from staff cost reduction from Australia and Indonesia; lower expenses in transport, travelling, fuel and port/handling charges as a result of lower activity; recovery of delinquent payments; and a commission increase on rental expenses incurred in China and Hong Kong.

The reduction in other operating expenses comes from a lower net foreign exchange loss; reduction in site and rental expenses; reduction in staff cost due to higher provision for bonuses in the previous quarter; and an increase in upkeep costs and depreciation expenses.

Partially taking from the savings in total operating expenses just mentioned, administration expenses spiked 5.5% or S$0.7 mln because of a headcount increase in Singapore, Indonesia and Australia. This was however partially cushioned by reductions in professional fees by about S$260,000.

Share of associates' profits has increased by 4.0% to S$1.1 mln but share of JV profits decreased by 25.2% to S$397,000.

Inventories went down S$10.9 mln mainly due to judicious inventory purchases during the period.

Improved collection of receivables pressed down trade and other receivables by S$6.0 mln.

From repayments and depreciation of the Australian dollar, total financial liabilities decreased S$13.2 mln.

Analysts surveyed by Reuters have an average HOLD call with a price target of S$1.13.

Bullish analyst report

Bullish analyst report

CIMB Equity Research says the company has not turned altogether bad overnight.

But the issues are beyond management control and fixes are needed.

Question

3. Can management actually fix these issues, or are they beyond their control?

Management reply: Agree with the analysts' comments below

(Total 6 questions)

We thank management for its response

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