Saturday, June 06, 2009

Tat Hong – FY 2009 Financial Analysis and Review Part 2

For Part 2 of my analysis for Tat Hong’s results, I will be focusing on their business divisions and analysing the performance of each, as well as highlighting the sales mix which has changed from FY 2008 to FY 2009. It is hoped that through this analysis, it will be possible to pinpoint whether Tat Hong is able to continue to maintain their gross margins and also whether they can sustain themselves with cash until the downturn has eased. Pump-priming measures introduced by the various Governments will be discussed in Part 3, including prospects for each division and how Tat Hong will change its focus gradually over the next few years as their China division grows stronger.

Business Unit Revenue Contribution, Sales Mix and Performance Review

From the above diagram and breakdown, it can be seen that for 4Q 2009, crane rental took up a more significant portion of revenues at 40.6% (combining crawler and tower crane rentals), compared to just 22.6% a year ago. Granted, this was based on a lower revenue base (total revenue dipped from S$183.7 million to S$110.7 million for 4Q 2009 against 4Q 2008, a 40% drop) but it illustrates how Tat Hong are slowly but surely moving towards a “rental” business model, and how it can help to sustain revenues and cash flows. If we dig deeper, it can be seen that crawler crane rental revenues barely dipped for 4Q 2009 compared to a year ago, with revenues holding steady at S$38.6 million. By contrast, sale of cranes fell 68% as the global downturn sucked up financing for companies and left them high and dry and unable to commit to more capex, hence hurting this division severely. Revenues from sale of cranes for 4Q 2009 fell from S$92.6 million to just S$29.7 million, and from the looks of things, is likely to worsen even further for 1Q 2010. Tower cranes, on the other hand, show good growth prospects as they now occupy 5.7% of Tat Hong’s total revenue pie (for 4Q 2009) and saw a 119% year-on-year revenue growth. General Equipment rental suffered a decline due to the discontinuance of the waste management division and heavy haulage New South Wales Division. As reported by the Company, the extended wet season in North Queensland in 4Q 2009 also affected sales. Interesting to note is that for the first time, the % contribution from equipment sales fell below that of crawler crane rental, registering 26.9% compared to 34.9%, which very clearly shows the shift from equipment sales (a low margin business division) to crane rental (a much higher margin business division).

If we look at the numbers on a full-year basis, crawler crane rental has managed a respectable 13% growth year-on-year, while tower crane rental revenues shot up 178% from S$8.9 million to S$24.7 million (the division was only set up in FY 2008 and expansion of the tower crane fleet was only carried out in FY 2009). What is eye-catching is that for FY 2009, both crawler and tower crane rental divisions made up 32.3% of total revenues of S$631.8 million, while for FY 2008 both these divisions only made up 26.2% of total revenues of S$639.9 million. The sales mix is thus shifting towards rental as Tat Hong has promised, as this can help them to buffer their revenues in the event of an extended downturn, as CEO Roland Ng had previously mentioned that during downturns, more companies choose to rent, rather than buy. It is objective evidence of this shift taking place and moving into FY 2010, I foresee more revenues shifting towards crane rentals as Tat Hong continues to bolster its Tower Crane Fleet (the fleet profile will be covered briefly in Part 3).

With the drastic decline in equipment sales for 4Q 2009, this translated into a full-year drop of 17% for this division, with revenues falling to S$254.5 million from S$306.2 million. Equipment sales now contribute 40.3% to total revenues for FY 2009, down from 47.9% a year ago. I expect the % contribution and magnitude to continue to fall for FY 2010 as the global crisis takes its toll on companies and constricts financing (banks are still afraid to lend normally). The shortfall in revenues from this division should be compensated for by the increased revenues from crawler and tower crane rental, though I suspect it may not be able to fully compensate. Therefore, FY 2010 will probably see a drop in total revenues from FY 2009 as mentioned by Roland Ng in a recent Reuters interview. The cushion will be the higher gross margins coming from the rental business, which I shall analyse in the section below. This will help to prop up gross margins and ensure net profit does not fall too sharply; as well as ensure steady operational cash inflows. Parts and Services division should remain relatively stable as companies still need to buy booms and hydraulic parts for the cranes they own, and Tat Hong also receives revenues from the myriad training courses it conducts.

Business Unit Gross Margin Breakdown and Analysis

By referring to the chart above, it can be readily seen that for 4Q 2009 against 4Q 2008, most business divisions saw a dip in gross margins. This was probably due to the fact that customers wanted more competitive pricing as they are facing financial difficulties, and that rental rates are also softening due to lower demand for crane rentals. Roland Ng did previously mention a possible 10-15% drop in crane rental rates, and the effects are probably reflected in the dip of 4.6 percentage points for crawler crane rental and the more drastic 24.7 percentage point dip for tower crane rentals. That said, both divisions still sported very high gross margins of 66.6% and 58.7% respectively. This was in contrast to the equipment sales division which had gross margins of just 14.8%, even though it contributed 26.9% of revenues for 4Q 2009. As mentioned earlier, this change in sales mix will help the Group moving forward, as it can help them to recoup lost revenues from equipment sales and maintain gross margins by shifting more of their sales towards rental instead of buying/selling. In fact, a quick glance shows that for 4Q 2009, gross margins actually improved by 5.8 percentage points to 43%, from 37.2% a year ago. I see this as a positive sign that 1Q 2010 gross margins will continue to get better as Tat Hong shifts more towards crane rentals, but the dip in overall revenues would be a dampener though. However, in the long-term, a more stable and dependable source of revenues and cash flows will exist for the company which is less subject to volatility of economic conditions.

For full-year numbers, Tat Hong managed to maintain their gross margins at 38.2% as their crane rental business grew strongly. The revenue drop was offset by the stable margins and if not for the exchange losses and the write-offs, net profit would not have dropped so drastically. For FY 2010, as the exchange rate for AUD is now 1.18 at time of writing, revenues will be boosted as most of it comes from their 70%-owned Tutt Bryant Group which translates its revenues to SGD. A weak AUD:SGD rate thus impacts revenues recognized on a Group basis. Crane rental margins continue to remain high at 62.7% for crawler cranes and 42.1% for Tower Cranes, while parts and services (seen as a stable division) also registered impressive gross margins of 54.3% for 4Q 2009 and 58.4% for FY 2009 (higher than FY 2008’s gross margin of 55.8%).

It should be noted too that high utilization rates will underpin good gross margins and high revenues from the rental business, and these are likely to fall amid the global financial crisis as some projects get put on hold in the construction, infrastructure and oil and gas industries. However, with Tat Hong’s continued participation in the oil and gas activities in Australia (Gorgon Project) and the power plant sector in Indonesia, this does provide some visibility for crane utilization rates. Utilization has dropped to 65.3% for overall fleet compared to high 70+% to low 80+% for most of FY 2008. More will be covered on this in Part 3 when I will discuss briefly on the fleet profile and utilization rates.


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