• S$72.9m of disposals since FY14
• Focusing on sustainable core business
• Expect debt reduction with proceeds

S$72.9m of disposals after a lacklustre FY14

Since a disappointing FY14 that saw PATMI dropping 53.4% to S$32.8m, Tat Hong has undertaken a series of disposals totalling S$72.9m – a sizable amount that is 124.4% of cash balance as of Mar-14. The disposal deals comprise: 1) a S$17.2m cash consideration for 31.27% interest in Kian Ho Bearings Ltd, 2) cash consideration of S$20.6m for 70% interest in Hup Hin Transport Co Pte Ltd, and 3) cash consideration of A$30.0m (~S$35.1m) for a conditional sale and leaseback agreement with TransLinQ Income Pty Ltd in relation to five Australian properties.

Focusing on sustainable core business

We believe the disposals will make Tat Hong more asset-light and allow the company to refocus on its core business in the face of a faltering Australian mining economy (44.0% of total revenue in FY14). We note that the disposals consist of both non-core (Kian Ho Bearings and Australian properties) and less profitable core (Hup Hin Transport) assets. Based on the management outlook from last results briefing, Hong Kong and Thailand will be growth areas, whereas Singapore and Malaysia are likely to see flat growth. This would be consistent with their divestment of Hup Hin, a Singapore and Malaysia heavy transport service solution provider. We think there might be further divestments of noncore or less profitable assets, with investments made in growth regions instead. However, we do not anticipate core earnings to bounce back to FY13 levels given that combined revenue from SE Asia and Hong Kong (19.3% of total revenue in FY14) is relatively small compared to that from Singapore and Australia (67.6% of total revenue in FY14).

Proceeds likely used for debt reduction

We think most of the proceeds will be used for debt reduction due to: 1) elevated net gearing of 0.71x as of Mar-14 (vs. 5-year historical average of 0.57x), and 2) little capex needs for subdued fleet expansion. We maintain HOLD with S$0.89 fair value estimate. We re-iterate accumulation if it drops below S$0.81 (10% below our FV and 26% discount to FY15F book value).

Source: OCBC Research - 10 Jul 2014