Wednesday, July 14, 2010

Tat Hong – FY 2010 Analysis and Review Part 2

Part 2 of this analysis takes a closer and in-depth look into Tat Hong’s business divisions, in terms of revenue performance, gross margin as well as proportion to total revenues. Take note though that FY 2010 is a year of the economic downturn and so the figures shown will probably be depressed and not reflecting normal economic conditions.

Business Unit Revenue Analysis

For 4Q 2010, crawler crane rental took up 32.2% of revenues, down from 34.9% a year back. The division also saw a 9.4% increase in revenues. The dip in proportional contribution can be attributed to higher equipment sales as enquiries increased post-crisis. Indeed, sale of cranes jumped 68% to S$50.2 million from S$29.7 million a year ago, and this division took up 38.3% of revenues for 4Q 2010, much higher than the 26.9% a year ago. Tower crane rentals also saw increased business year on year, as revenues increased 34% to S$8.5 million. Though this division only contributed 6.5% of total revenues for 4Q 2010, it is expected that with the new JV and business expansion which the Group is undertaking, this contribution is set to rise further in future periods. Spare parts and general equipment hire saw dips due to reasons as lined out in the financial statements announcement, but should see more pick up once the Australian side gets going with their economic boosting plans, amid progress on oil and gas projects picking up steam once again. Recall that Tat Hong owns 70% of Tutt Bryant which is their Australian subsidiary, and Tutt Bryant had also reported muted numbers as a result of the ongoing financial crisis.

For FY 2010, the effects of the shift to a “rental” model are more apparent, as crawler crane rentals took up 33.4% of revenues (at S$165.4 million), compared to 28.4% in the previous year. Though revenue for crawler crane rental dipped 8% year on year, it was still the dominant revenue contributor and with the high gross margins, has helped to keep overall gross margins afloat for the Group. Crane sales’ contribution has dipped from 40.3% the previous year to 34.5% for FY 2010, roughly in line with the contribution from crawler crane rental. The 33% dip in revenues was mainly due to the sharp drop in business for the first 3 quarters, which was partially mitigated by the higher sales recorded in 4Q 2010. Tower crane rental’s revenue contribution jumped from a mere 3.9% to 6.8% for Full-year, and the division experienced a 36.5% growth in sales as Tat Hong expanded their Tower Crane fleet substantially through more synergistic acquisitions and joint ventures in China. Moving forward, it is expected that this division can continue to grow, with the help and network which AIF Capital provides. General equipment rental’s contribution dropped to 14.6% while revenues fell 38.5% year on year; while for sale of spare parts its contribution increased slightly to 10.7% from 8.8% while revenues dipped slightly by 4.1%.

To summarize, we should be able to see more revenue shifting to crawler and tower crane rentals in future periods, as Tat Hong slowly shifts its business model during this crisis to focus more on stable rentals rather than volatile equipment sales.

Business Unit Gross Margin Analysis

The gross margins for crawler crane rental for FY 2010 remained fairly constant at 61.9% against 62.7% for FY 2009. This was despite the slight dip in revenues year-on-year, and showed this division to be fairly resilient in spite of the global financial crisis. As Tat Hong shifts more and more of their inventory to fixed assets, we should see the gross margins for the Group improving as rental of cranes has a much higher gross margin than equipment sales. Sale of cranes for FY 2010 only generated gross margins of 8.4%, against gross margins of 61.9% for crawler crane rental! However, for tower crane rental, gross margins fell 5.3 percentage points from 42.1% to 36.8% due to increased competition. This is one area which Management should try to tackle as the erosion in gross margins may offset any positive effect from fleet expansion and revenue growth. It is useless expanding revenues while not keeping a cap on pricing and gross margins.

It is also not explained why the gross margin for sale of cranes fell by a whopping 8.8 percentage points from a decent 17.2% to the current 8.4%. This is a clear red flag and has to be addressed at the AGM, as quite a significant and substantial bulk of revenues continues to flow into this division. One possible reason I can speculate on is that Tat Hong had to give discounts to induce customers to trade during this difficult period, and this impacted their gross margins but allowed them to capture and retain market share, and to build on existing customer relationships.

Gross margins for sale of spare parts also dipped slightly to 57.1% from 58.4%. For general equipment rental, the surprising result was gross margins were lifted by 7.6 percentage points to 43.5% from 35.9% a year ago. This also was not explained at length and it is rather disturbing to see gross margins fluctuate so much within just one year. I had the impression that their business was a stable type with not much pricing movements unlike in manufacturing; but apparently I was wrong as margins have moved around a lot within the divisions, even as outwardly, the gross margin for the Group shows little change. This is another query to raise up during the upcoming AGM.

Part 3 of the analysis will focus on Tat Hong’s Inventory levels, as well as plans and prospects, as the world attempts to emerge from the worst recession in 70 years. Hopefully, Tat Hong may stumble but will not fall flat due to this crisis.

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