• Subdued outlook for core markets
• Proposed spin-off could conclude by early next year
• No interim dividend declared

Striving to improve operating performance

Tat Hong’s 2QFY16 revenue dropped 10.1% YoY to S$137.4m while PATMI declined 61.7% to S$4.4m. Excluding one-off items, such as FX gains and a S$4.8m gain on disposal of a subsidiary Hup Hin Transport last year, bottomline was estimated to be comparable. Notably, management managed to pare operating expenses, such that operating margin was 10.3% vs. 8.2% in 1QFY16.

Management embarked on a few measures to improve operating performance, such as implementing wage freeze for Singapore and Australia, reducing staff levels, disposal of under-utilized assets, strict capex control as well as scaling down unprofitable businesses. More importantly, management sees further room to continue such measures amid the tough operating environment.

Distribution sales grew this time

Sales from the Distribution segment grew 12.5% YoY to S$54.8 while the other segments saw declines. On a QoQ basis, overall revenue was down 1.4% and gross profit margin was a tad lower by 0.4ppt to 31.6%. Crane Rental sales (- 2.4% QoQ) were affected by the completion of projects in Australia and Thailand, while bright spots came from Hong Kong and Indonesia on better utilisation rates and new contracts. Tower Crane Rental segment’s sales decline (-1.3% QoQ) was due to the completion of projects as well, but we understand that the cranes are back to being utilized at the moment.

General Equipment Rental sales (+0.9% QoQ) was impacted by increased pricing pressures as well as the depreciation of AUD/SGD. Distribution sales (-0.9% QoQ) were helped by better sale of cranes to Hong Kong, Japan, Brunei and Thailand, while sales to Malaysia and Singapore were lower. This segment also recognizes the sales of used equipment as part of the group’s fleet reduction exercise.

Maintain HOLD

Given the subdued outlook for Tat Hong’s core markets, we cut PATMI estimates by 4%/12% for FY16/FY17F respectively. Note that there was no interim dividend declared, vs. 0.5 S-cent a year ago. Maintain HOLD with fair value estimate of S$0.56 (previous: S$0.57). The proposed spin-off of the Tower Crane Rental segment on TWSE could conclude by early next year.

Source: OCBC Research - 16 Nov 2015