Below is my analysis of Tat Hong’s financial statements as well as a discussion on their prospects in the next couple of years in light of the global financial crisis, which has so far thrown Singapore, Hong Kong and Japan into recession (in Asia). I will do the usual sectional analysis for Tat Hong but will keep it short in order to discuss more of the growth and cash flow aspects of the company in the coming years. I will also be posting a transcipt of an interview which CEO Mr. Roland Ng did with Reuters on October 7, 2008, in order to extract some sections to comment on.
Profit and Loss Analysis (note: numbers are for 1H 2009, not 2Q 2009)
Revenues increased 26% from S$298.3 million to S$375 million, as a result of all divisions growing their revenues by double digits. More on that later as I drill into the divisional analysis. Gross margins however, contracted by 1.7 percentage points from 38.5% in 1H 2008 to 36,8% in 1H 2009, as a result of higher COGS (an increase of 29%), therefore gross profit only increased by 20% from S$115 million to S$138.1 million.
Expenses for 1H 2009 were kept well under control, as evidenced by all categories of expenses increasing by less than the increase in revenues of 26%. Other operating expenses and finance costs only increased by 16% while share of profits of associates increased by 24%. However, moving forward, I would expect share of profits from associate (Yongmao) to fall as the tower crane rental division may take a temporary hit from the global economic crisis.
Net profit (attributable to shareholders) increased by 28% from S$40.2 million to S$51.3 million. Since earnings will be fairly stable and be driven more by rental income rather than sale of cranes, I will use a rough PER approach to ascertain the PER at this point in time. Using S$51.3 million and annualizing it, we get S$102.6 million. EPS is therefore 20.32 Singapore cents. At today’s closing price of 56 Singapore cents per share, Mr. Market is valuing Tat Hong, the world’s largest crane company by crawler crane fleet, at a mere 2.75 times projected FY 2009 PER.
Balance Sheet Review
PPE went up to S$370 million as a result of additions to their crane fleet, while inventories remained or less constant. As mentioned in the financial report, the increase in PPE was due to expansion of rental fleet to meet increased rental demand. In the interview below, Mr. Roland Ng mentions that Tat Hong will be moving towards a rental business model in order to generate recurring income and sustainable cash flows. Cash had decreased from S$75 million as at 6 months ago compared to S$47.7 million at present (Sep 30, 2008), and more will be elaborated on in the cash flow statement review. Non-current financial liabilities had increased from S$96.5 million to S$122 million, which was the result of the drawdown on financial leases to purchase plant and equipment. Read more…