Tiong Woon: Deeper into the red (DMG)

(SELL, S$0.23, TP S$0.19)

Tiong Woon (TWC) plunged deeper into the red in 4QFY11, from a loss of $0.2m in 3QFY11 and

a profit of S$2.8m in 4QFY10 to a loss of S$0.7m. Consequently, we have cut our FY12 earnings forecasts for Tiong Woon (TWC) by 90.4% to S$1.6m, on the back of lower turnover and gross profit margins. While TWC’s balance sheet remains strong, there is a lack of near term catalyst and in the face of intense competition, we are maintaining our SELL call. In addition, with concerns of another economic slowdown looming, there might be more project delays going forward. We have lowered our fair value to S$0.19, based on 0.3x FY12 P/B (the trough level TWC traded at during the last global financial crisis).

Another loss-making quarter. TWC earnings for 4QFY11 came in below our expectations,

largely due to lower than expected gross profit margins achieved (-8.9ppt QoQ). Earnings

slumped from S$2.8m in 4QFY10 to a loss of S$0.7m this quarter, attributable to a 24.5% YoY

decline in revenue (due to lower rental rates and reduced business activity) and a 9.6ppt drop YoY in gross margins from 27.5% down to 18% in 4QFY11. FY11 earnings was weak, coming in at just under S$1m versus S$23.9m in FY10.

Strong balance sheet. TWC’s cash balance stood at S$34.7m, thus giving it the financial

strength to ride out the down cycle, while continuing with its fleet renewal programme. For FY12, management has allocated ~S$40m for the purchases of cranes, similar to last year. A dividend of 0.4S¢ per share was declared for FY11 (yield of 1.5%), unchanged from the previous year.

Cutting earnings estimates. With the various activity going on Jurong Island (Jurong Aromatics plants and Lanxess plant) and the region, management is still seeing business opportunities around. However, impact to the bottom line may emerge only in 2HFY12. We cut our FY12 earnings estimates by 90.4% to S$1.6m, primarily on a 17.2% decline in turnover across its Heavy Lift and Haulage, Marine Transportation and Fabrication and Engineering segments, as well as lower gross profit margins (from 30% to 25%) with the over-supply situation of cranes still depressing rental and utilisation rates, as well as competitive bidding.