Tat Hong Holdings poised for strong year-end finish

Rosy 4QFY3/13 results expected.

Maybank Kim Eng sounded off the positive forecast based on the robust nine-month performance Tat Hong Holdings has shown so far, with Crane Rental and Tower Crane segments see to continue driving growth.

Here's more from Maybank Kim Eng:

Expect a strong finish to the year. Tat Hong will announce its 4QFY3/13 results on 28 May. We expect a strong finish to the year with 4Q revenue of SGD232m and net profit of SGD17m, up 27% and 50% yoy respectively. For 9MFY13, Tat Hong has met 73%/76% of our full-year revenue/net profit targets. We continue to see Tat Hong as the best proxy to ASEAN infrastructure and Australia oil&gas sector play. Reiterate BUY with target price SGD1.78.

Main growth drivers remain. Crane Rental and Tower Crane are expected to drive the growth; forecast 41% and 22% FY3/13 revenue growth in those two sectors. For Crane Rental, we expect new contracts in the pipeline to drive utilization higher. We also think rental rates have some room to be raised further. Distribution and General Equipment Rental might be affected by the subdued demand in Australia out of the resources sector but they only account for 33% of gross profit.

Possible upside surprises to our FY14/15 forecasts. 1) Current utilization rate of 71% have ample headroom to improve vs peak utilization of 80%. 2) Our current low single digit rental rate increase in FY14/15 also has upside potential. 3) Further growth could come from the expansion of fleet size. Crane prices are still lagging behind the rental rate hike and the depreciating JPY will also benefit equipment buyers like Tat Hong.

Better cost control than peers. Rising labour cost and shortage of crane operators are two concerns for this industry. Tat Hong has some advantage on this front partly because its bigger size helps to drive down the average labour cost. For example, the labour cost to revenue ratio for Tat Hong was only 16% in FY12 compared with 20-25% for peers, which highlights Tat Hong’s ability to generate revenue in a more cost-efficient way.

More upside once short term share overhang removed. Tat Hong shares have been shorted heavily since last month after AIF converted 53m convertible preference shares into common shares. Investors worried that AIF will sell its shares in the market, which explains the weakness in share price recently. We think such potential selling will only have a short term impact on share price and in the long term, we view it positively as it will improve the liquidity of the stock. Maintain BUY.