Tat Hong – FY 2009 Financial Analysis and Review Part 3

For this third and last part on my analysis of Tat Hong’s FY 2009 financials and prospects, I would like to touch a little on their fleet profile as well as prospects moving forward. As readers are probably aware, the global financial crisis has yet to recede and many companies are still struggling to cope with declining orders and reduced demand for their goods and services. Tat Hong is no exception to this and they have not escaped unscathed from the carnage wrecked upon the economy. However, my analysis and discussion shall touch on how the Company is able to weather the storm and maintain a decent level of cash inflows and profitability till the dark clouds clear; and perhaps also snag some good M&A opportunities at the same time.

Fleet Profile and Utilization


For their total fleet profile, it can be seen that they are slowly increasing their total units as well as total tonnage. Their fleet of higher tonnage cranes has increased significantly over the years, as I believe this category of cranes command better rental rates, though there has also been a sizeable increase in the lower tonnage category as these cranes are used for more general purpose work (i.e. not specialized). However, one negative observation is that utilization level has been steadily falling since 2007 (the year the sub-prime problems broke out and led to the sharp recession). Utilization hit a high of 83.5% as at June 30, 2007 and has declined till the current 65.3%. For FY 2010, I would expect utilization levels to fall even further (though probably not below 60%) as the recession is still ongoing and there is no let-up in sight. Tat Hong is still active in the oil and gas sector in Australia and the mining sector in Indonesia, and is increasing their presence in China through their tower cranes segment. Even if utilization levels remain steady, utilization rates may fall as customers negotiate for lower fees amid the downturn. Roland Ng, who is the CEO of Tat Hong, projected a 5-10% fall in utilization rates for FY 2010. Thus, the effects of the drop in utilizaton levels and rates may cause continual depression of earnings for Tat Hong, though the shift in sales mix as discussed in the previous part 2 should mean that there will be a cushion for gross margins (and hence gross profits). Rental profits will make up a larger portion of the pie but the pie itself will shrink due to less business being available to the Company in the near-term. In the medium-term though, I expect the situation to be alleviated once the effects of pump-priming and fiscal stimuli kick in.

For Tat Hong’s Tower Crane Division, the fleet has been steadily increased over the last few quarters (the division was only set up during FY 2008). The total units have increased from 216 as at March 31, 2008 to the current 262 units; with total tonnage-metres increasing from 35,462 to 49,040 (an increase of 38%). Utilization levels have dropped as well as per the global financial crisis, from 83.9% to the current 73.3%. The Group’s plan is to continue to expand their Tower Crane fleet as China will be spending a huge amount of money on fiscal stimulus.

Future Plans and Prospects

Singapore

With the local Government pouring in S$18 billion to S$20 billion this year to revive infrastructure works and projects, the construction industry is expected to remain buoyant for the next 2-3 years. For the next 2-3 years, another S$15 billion to S$17 billion will be pumped in for building and infrastructure projects. As the effects of the pump priming take effect, it should see a steady demand for crane rentals which would ensure Tat Hong receives a steady stream of cash inflows. As mentioned previously, gross margins for rental are very high (>60%) and Tat Hong’s aim is to derive 75% of its gross profit from rental in time to come.

China

Tat Hong’s next organic growth engine division is that of China, with their two JV with Fushun Yongmao as well as Beijing Tat Hong Zhaomao Equipment Rental. China’s economy is one of the most resilient in the South-East Asian region, as it does not depend too much on exports. Local consumer demand can ensure the country continues to grow at least 5-6% per annum, even during this severe economic climate. This, plus the fact that the Government has announced that it would introduce a stimulus package which would cover 10 areas, including construction of new railways etc, has brightened prospects for Tat Hong in pursuing this growth avenue. China will spend about US$200 billion on infrastructure development alone. Since the tower crane rental business model is still relatively new in China, Tat Hong is trying to get a first-mover advantage by partnering with one of the largest tower crane manufacturers there. It is therefore envisaged that this division would continue to show growth in FY 2010, along with high gross margins.

Australia

Tat Hong are mainly involved in the O&G and LNG projects in Australia, through their 70%-owned Tutt Bryant Group, which features its own range of cranes and heavy equipment for these industries. These projects are likely to continue even in the face of uncertainty, as much capital needs to be locked in advance before the projects can commence. The Australian Government had also announced a massive stimulus package involving construction and replacement of old infrastructure, so this will continue to benefit Tutt Bryant (and hence Tat Hong).

In addition, Australia had recently shown themselves to be resilient in the face of the global economic downturn. 1Q 2009 GDP showed a growth of 0.4%, reversing a contraction of 0.6% in 4Q 2008 and helping the country to avert a technical recession. Consumer confidence in Australia had also gone up to 100.1 as the effects of the fiscal measures increased domestic spending and helped the economy here to grow, albeit marginally. The AUD has also strengthened considerably against the SGD after hitting a low of 0.92 to the SGD; it is now close to 1.20 to the SGD. Thus, the forex troubles which plagued Tat Hong during 3Q and 4Q 2009 should probably not recur again in 1Q 2010.

Summary and Conclusion

Tat Hong will continue to maintain their crane rental fleet in order to grow their rental division. The Equipment sales division is very likely to continue to contract during FY 2010, but the other 4 divisions’ stability should provide significant buffer to revenues and to earnings. Note too that gross margins are higher for crawler and tower crane rental as compared to equipment sales, so this will provide an added boost as well. That said, it bears repeating that crane rental utilization levels and rates will probably continue to fall as the effects of the financial turmoil sweep through the world; thus I would expect FY 2010’s profit after tax to dip as compared to FY 2009.

The Company had also mentioned that they will trim down their trading stock as and when appropriate, in order to convert some of it to much-needed cash. The mistake which Management made during the 2000-2002 period was hoarding too much inventory at high cost amid slumping demand, which resulted in significant write-offs and leading to a net loss.

On a positive note, the Group will continue to look out for M&A opportunities amidst a very depressed market which may see some companies and assets being offered at distressed levels. The Company is on the lookout for possible M&A opportunities in the Australian crawler crane and general rental markets.