Saturday, February 06, 2010

Tat Hong – 1H FY 2010 Analysis and Review Part 2

In Part 2, I will be examining the Business Unit performance for Tat Hong’s various divisions (they have 5 in total) and commenting on the margins for each division. Please note that the financial crisis may skew the numbers during this period, thus it may not be representative of the actual gross margins in terms of the average performance for each division over the long-term. I will need more time and data to compile in order to see the trend of gross margins and also the core performance of each division as a comparison against Management’s stated growth plans.

Business Unit Revenue Analysis

Looking at 1H FY 2010 (“this year”) versus 1H FY 2009 (“last year”), one can clearly see a trend of revenues shifting from equipment sales to crawler crane rental. For this year, crawler crane rental took up 34.5% of revenues, up from 24.6% last year. By contrast, equipment sales % fell from 46.9% to just 32.2%. If we add up Tower Cranes’ share of revenues, then for crane rental for this year, the proportion of contribution to revenue jumps to 41.4%, versus just 27.7% last year. That is a significant jump of 13.7 percentage points and does demonstrate Management’s commitment to transforming Tat Hong into a “rental” company. Of course, if we are comparing revenues on a year on year basis, the drops have been pretty steep due to the severity of the global downturn; and Tat Hong is after all in a cyclical industry where the demand for their cranes and heavy machinery stems from economic growth and policies which affect construction and oil and gas industries.

Looking at 2Q 2010 versus 2Q 2009, there were steep drops in crawler crane and general equipment rentals, with decreases of 16.9% and 43.6% respectively. The Company should focus more on cost control during such periods and I was disappointed that they could not reduce their cost base, thus eroding profits by a significant amount as compared to the drop in total revenues. Tower Crane division was the only bright spark amongst a dismal quarter, as revenues there climbed 45.5% from S$6.1 million to S$8.9 million. Equipment sales dropped a very steep 50.8% as customers withheld investments in capital equipment due to higher financing costs by banks amid tightened regulations in the wake of the financial crisis. A recent announcement by Tutt Bryant also seems to imply the worst is yet to be over, and demand for the Group’s services may remain subdued for quite a while. It will take a least a few more quarters (I believe) for business activity to get back to pre-crisis levels. In the meantime, the Company is channelling more funds into growing their China Tower Crane operations, while slowly converting more of their inventory to fixed assets (from sales to rental).

Business Unit Gross Margin Analysis

2Q 2010 versus 2Q 2009

It is readily apparent that gross margins for 4 out of 5 business divisions declined, with only General Equipment Rental showing an improvement in gross margins of 6.2 percentage points to 44.2% for 2Q 2010. Note too that crawler crane rental gross margin remained very high at 60.5%, despite dipping about 2 percentage points from the same period last year. For Tower crane rental, gross margins were 32.6% and 36.1% for 2Q 2010 and 2Q 2009 respectively. Though this is significantly lower than crawler crane margins, it is still much higher than the gross margins achieved through equipment sales, which on average only registers gross margins of less than 20%.

The good news is that the revenue mix has shifted significantly, away from equipment sales and towards more of crane rental, as can be seen in the previous table. For 2Q 2010, Equipment sales made up just 33.6% of revenues, down from 45.2% a year ago. Crane rental, on the other hand, made up a total of 40.6% of revenues for 2Q 2010, up from just 29.8% a year ago. This has resulted in overall blended gross margins increasing from 36.8% to 39.7%, as more revenue has been accrued through higher margin activities. Since the trend for the Group is to move towards being a “rental” company, and Tat Hong is also building up its Tower Crane division in China, there is a high chance of increasing gross margins in the years to come.

1H 2010 versus 1H 2009

For 1H 2010, gross margins for crawler crane remained quite stable, at 61.1%, just a slight dip of 2.2 percentage points from the same period last year. This was probably due to customers asking the company for lower rates as the economic crisis has hit everyone hard. Tower crane margins also dipped to 33.9% from 36.8%, and the most severe dip came from Parts and Services which saw gross margins fall 8.8 percentage points from 61.3% to 52.5%. General Equipment Rental saw a huge boost in gross margins, surging 17.8 percentage points from 24.3% to 42.1%. Though it is unclear what caused the big boost to gross margins for this division, it is most likely pricing power and possibly a shortage of supply, but this is just postulation. More quarters will have to pass to determine if this was a one-off occurrence, or whether there is persistence in maintaining these higher gross margin levels.

Overall, for 1H 2010, gross margins improved to 39.6%, up 5.3 percentage points from 34.3%. Note that there is a trend of increased gross margin as Tat Hong shifts away from its heavy reliance on equipment sales and moves towards crane rentals. It is beefing up its rental fleet (classified as PPE), while reducing its inventory of cranes and heavy equipment. However, the revenues will certainly dip as crane rentals typically have lower volume compared to equipment sales, especially during bullish periods. With the news from Tutt Bryant that conditions have yet to significantly improve, and that the economy may remain sluggish for an extended period of time, Tat Hong’s earnings are also expected to stay flattish, though Tower Crane segment shows good signs of potential growth.

Part 3 of the analysis will focus on Tat Hong’s Inventory levels, as well as plans and prospects, incorporating all the news which has flowed in since Nov 2009 when the results were released.


Trendlines said...

Nice analysis on Tat Hong. In my view, this company's profit margins reflect the growth of the region. Along the same lines, the price action of SGX is a pretty good indicator of the financial mood in singapore and the region. I have a done a piece of (technical) analysis on this that you may find interesting.

I welcome your views.

Musicwhiz said...

Hi Trendlines,

I think you've drawn a beautiful chart. My artwork was never very good in school, and I struggled wth graph drawing during Math class as well.

But I have no comments at all on charts, sorry. My strength is in analyzing financials and fundamentals, and not in reading charts and graphs.


Trendlines said...

Thanks mwhiz for your reply. Charts draw themselves, or should i say Mr Market draws the charts, i just post them up ;)

Value investing and elliot wave theory have the same underlying concept - the mood swings of the population, or Mr Market. I've noticed you talked about valuations being relative in bull and bear markets. That is where technicals might be of interest as the trend tells us about the sentiment, especially in conjunction with elliot wave theory.

Anyway, keep up the good work. I'll be counting the votes as they come in, while you help me keep track of the weighing machine(to rephrase Ben Graham). Meanwhile, following your work as always :) Cheers

Musicwhiz said...

Hi Trendlines,

Thank you for visiting!


jason said...

Tutt Bryant & Fagioli form JV to create one big
lifting company (Tat Hong release 17 Feb 2010)

Sydney, [15] February, 2010 Tutt Bryant Group Limited (ASX :TBG) has joined
forces with Fagioli SpA , one of Europe’s largest heavy lifting specialists, to form
TBF Oceania Pty Ltd (Tutt Bryant Fagioli) an incorporated 50:50 joint venture (JV)
Fagioli is a privately owned company headquartered in the Reggio Emilia region of
northern Italy and has more than 50 years of expertise in the heavy lift and
transport sector .
TBG and Fagioli are ideally matched, their combined resources and experience
have created a joint venture that is able to provide a new level of lift and shift
capability in the Australian market.
TBF will operate at the very top of the industry. Its engineering and technical
resources will enable it to tender for and undertake any project requiring the
movement and lifting of components of up to 32,000 tonnes.
Resources projects like Gorgon LNG, Gladstone LNG, Wheatstone, Impex and
others are being applied for, either to pre-qualify or as a full tender. TBF has the
necessary resources to satisfy not only the technical scope of works of all these
projects but can deliver a comprehensive crane and heavy haulage package that
meets appropriate Occupational Health Safety & Environmental standards as well
as required human resources conditions.
Mr David Haynes, Managing Director of TBG, said that he is excited by the
potential of the JV.
“TBF will provide cranage from 20 tonne to 1,350 tonnes and platform trailers in
excess of 1,650 axles (being a combination of modular and self propelled units),”
he said. “Gantry systems from 450 to 1,400 tonnes, strand jacks up to 750 tonnes
individual capacity and unlimited combined capacity will deliver real competitive
advantage as we tender for large resources projects, “ he said.
“Fagioli recently achieved a world record lift of 32,000 tonnes using strand jacks.
“In addition, the JV will be able to offer 3,000 tonne capacity tower lift systems plus
7,200 tonne capacity jacking and skidding systems. The heavy haulage division will
have over 30 prime movers and a fleet of various trailers ranging from flatbeds, low
loaders and platforms,” Mr Haynes said.
The partnership has a formidable lifting, jacking, skating and heavy haulage
capability. It also has engineering resources to design and apply economical and
safe lifting and moving solutions including a project logistics division dedicated to
freight forwarding activities and operating on a world- wide basis for major projects
in Australia and the surrounding region.

For further information:
Mr David Haynes
+ 61 2 9646 6001
Mr Fabio Belli
+ 39 33 5579 3562

Musicwhiz said...

Jason, thanks. I know this news already but I do not think it will have much impact on TB's financials; at least not in the short term.