Tat Hong’s profit down by 30.5% to S$31.7m

Results impacted by one-off items... Tat Hong Holdings (Tat Hong) reported FY11 net revenue growth of 17.9% to S$584.2m, while net profit fell 30.5% to S$31.7m due to higher staff costs and several one-off items. Stripping away one-off items relating to goodwill, net loss from the recent Australia floods and gains/losses from acquisitions and disposals of investment, net profit would have increased by 11.7% YoY to S$38.3m.

… such as loss from Australia floods and goodwill impairments... Tat Hong has incurred S$6.4m of losses from the recent Australia floods. However, management expects to recover S$5.4m from insurance, resulting in a net financial loss of S$1m for the Australia floods. Tat Hong had also made a one-off S$5m impairment of goodwill on its Australian subsidiaries. This relates mainly to its subsidiaries in New South Wales, which were previously purchased in excess of their net asset values. Nonetheless, we note that this is an accounting adjustment with no ssociated cashflow.

…and rising staff costs. Staff costs jumped by S$11.5m in FY11, largely due to increased headcount from its newly acquired subsidiaries and increased hiring in Australia. The group had also reinstated salaries for employees who were affected by cost cutting measures implemented in the previous financial year.

Lower margins. Although FY11 revenue increased by 17.9% YoY to S$584m, gains were partially offset by lower margins (FY11: 35.7% vs. FY10: 38.5%). Consequently, gross profit increased by a smaller 9.2% YoY. This was evident in the Distribution, Crane Rental and Tower Crane Rental business segments, which faced stiff competition. Utilisation rates in FY11 for the Crawler/Mobile and Tower Crane fleets remained low at 59.8% and 66.5% respectively (versus 56.6% and 73.9%
in FY10).

Outlook remains muted. Due to the continued weakness in the industry, margins and utilisation rates are likely to head lower. Management acknowledged the stiff competition and attributed it to an influx of overseas players entering the regional markets. In markets where Tat Hong has an established presence, we believe it should be able to hold well as against new entrants. For example, it should be able to participate actively in a number of reconstruction and infrastructure projects in Australia, given its longstanding presence in the country. Meanwhile, due to a change in analyst coverage, we put our previous HOLD rating and S$0.99 fair value estimate under review.