• Hit by impairment and FX charges
• Subdued outlook for most markets
• Tower crane segment improved in 4Q

A tough year

Tat Hong’s 4QFY16 revenue fell 7% YoY to S$124.8m and overall gross profit margin (GPM) declined by 5.6ppt to 26.3%. A wider net loss of S$39.8m was recorded vs. a net loss of S$17.1m in 4QFY15. This was attributable to several factors including FX losses of S$7.7m as well as S$32.5m in goodwill and asset impairment charges mainly relating to its wholly owned Australian subsidiary and an associated company.

On a full year basis, revenue fell 13% to S$528.2m and GPM was 4.6ppt lower at 30.2%. A net loss of S$39.3m was reported vs. a net profit of S$4.9m in FY15, partly due to FX losses of S$14.9m incurred vs. an FX gain of S$12.0m in FY15.

Better 4Q for Tower Crane Rental

In 4Q, Tower Crane Rental segment was the only segment that saw a positive YoY sales growth of 4.0% (albeit -2.5% QoQ) as well as a much higher GPM of 37.7% (FY16: 29.7%). This was underpinned by better utilisation rates due to new projects commenced, coupled with lower depreciation and crane operator costs.

Crane Rental sales (-3.0% QoQ) were mainly affected by the completion of projects, and Australia continues to see lower margins from pricing pressure and lower utilisation rates. General Equipment Rental segment still faces competitive pressure on hire rates while Distribution has been scaling down its excavator sales business in Indonesia amid generally lower demand in certain markets.

Outlook still subdued

Similar to its industry peers, the group expects demand in most of their markets to remain subdued for the year ahead. The tepid outlook for the industry will likely continue to weigh on earnings recovery, while the group’s share price may be supported to some extent for now in view of a possible transaction that may or may not lead to an acquisition of its issued share capital.

Meanwhile, we expect further scaling down of non-core, unprofitable businesses among other measures to improve their operating performance. All considered, we maintain a HOLD rating, and raise our peg to 0.55x from 0.45x P/B, bringing our fair value estimate to S$0.50 (previously S$0.45). No dividends were declared this time, as compared to 1 S-cents/share given out last year.

Source: OCBC Research - 30 May 2016