Tat Hong

Tat Hong’s 1QFY16 net profit tumbled 53.2% y/y to $2.8m despite booking $8.5m gain on disposal of properties in Malaysia and Australia as well as other plant and equipment. Stripping out these one-time gains, the group would have been loss-making.

Revenue slid 15.2% to $139.3m due largely to broad based declines across all its business segments. Excluding the currency effects of a weaker, AUD against SGD, revenue would have fallen by 7%.

Segmental review:
Crane rental - Revenue share dropped to 35.2% (1QFY15: 40.4%) or $49m (-26.1%) following the disposal of a crane rental subsidiary as well as a weaker AUD. Stripping these out, revenue still fell 12% as projects across Asia and Australia were completed amidst delays in new projects in Malaysia, Thailand, and Hong Kong.

Tower crane rental - Revenue dipped to $23.3m (-5%) due to the completion of projects as well as lower utilisation rates. Contributed 16.7% (1QFY15: 14.9%) to topline.

General equipment rental - Revenue slumped to $11.7m (-28.2%) on the weak AUD as well as a slow recovery in the Australian construction sector. On constant currency terms, revenue would have declined 19%.

Distribution - Became the largest topline contributor (39.7% vs 1QFY15’s 34.8%) even as revenue eased to $55.3m (-3.1%) amid lower excavator sales in Indonesia due to downsizing as well as a decline in spare parts sales, mitigated by higher demand in Hong Kong, Thailand and Japan.

Lower utilisation rates, higher cross-hire charges as well as freight costs in Australia compressed gross margin to 32% (-4.4ppt) as gross profit fell to $44.6m (-25.4%).

The group booked one-off disposal gains of $8.5m but these were eroded by cost savings that did not keep pace with the revenue decline, as well as FX losses of $4.1m and negligible associates/JV contributions of $0.1m (-91%).

Net gearing remained virtually unchanged at 52%.

Management guided that its crane rental segment would continue to be affected by weakness in the ASEAN and Australian markets. Hence, it is looking to rationalise its existing fleet size and restructure its operations.

The general equipment rental as well as distribution businesses are expected to sputter amid the slow recovery in the Australian construction market and keen competition.

The sole bright spot appears to be its tower crane rental segment which is expected to grow steadily on the back of ongoing projects and new infrastructure opportunities in China.

At current prices, it is trading at a 51% discount to its NAV. P/E valuation is meaningless as the group is operationally in a loss position.