Tat Hong Holdings Ltd (OCBC)

Maintain HOLD
Previous Rating: HOLD
Current Price: S$0.835
Fair Value: S$0.76

Waiting for recovery…

Completion of acquisition. Tat Hong announced that its associate company, THL Foundation Equipment Pte Ltd, has completed the acquisition of a 70% interest in Ice Far East Pte Ltd last week. The latter, which has offices in Singapore and Malaysia, is engaged in the trading and rental of foundation engineering equipment in South East Asia, Hong Kong and India. This acquisition is expected to strengthen Tat Hong's position within the foundation engineering segment and deepen its geographical footprint across the region. In addition, Tat Hong believes that there are opportunities for cross selling of products.

Increasing competition. Competition within the industry is stiff and has intensified over the past few years, largely due to an influx of overseas players entering the regional market. Rental and utilization rates have fallen and remained low. As of 31/3/2011, Tat Hong's utilization rates for crawler/mobile f l e e t a n d t o w e r c r a n e f l e e t a r e a t 5 9 . 8 % a n d 6 6 . 5 % , respectively. This situation may persist in the near term as the industry remains over-supplied in terms of cranes, and demand has yet to pick up substantially since the financial crisis.

Waiting for Australia's recovery. The recent natural disasters in Aust ral ia have resul ted in disrupt ions to a number of inf rast ructure projects. Several of Tat Hong's plants and equipment were also damaged by the floods. As the impact of the natural disasters recedes, reconstruction activities should provide some earnings upside in the near term. However, actual construction work may come through later rather than earlier because (i) plants and equipment that were damaged need to be replaced / repaired, and (ii) planning and tender processes would require time.

Watch the costs. Another area to look out is the costs of doing business. Over the near term, rising inflation may result in higher distribution costs. Given the intense competition within the industry, Tat Hong may not be able to pass on the increased prices to its customers. Staff costs have also risen sharply due to increased hiring in Australia and reinstatement o f s a l a r i e s f o r t h o s e a f f e c t e d b y c o s t c u t t i n g me a s u r e s implemented during the previous financial year.

Reiterate HOLD. We have tweaked our estimates to reflect the stiff competition and weak demand in the industry. Although we expect Australia to provide some earnings upside, the timing of recovery remains uncertain. We reiterate our HOLD rating with fair value estimate of S$0.76, valuing the company at 12x its FY12 EPS.