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Is it worth buying Tat Hong shares now?

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Founded in the 1970s in Singapore, Tat Hong is a listed company that provides crane rental services in the construction and offshore marine industry. It now operates 1,500 cranes across the region. By tonnage, it is the seventh largest crane rental company worldwide. Is it worth buying Tat Hong shares now? In this article, I will share my insights on Tat Hong’s investment value.

On 15 March 2016, the company announced in the SGX website that “it has been approached in connection with a potential transaction which may or may not lead to an acquisition of the issued share capital of the Company. Discussions are preliminary and there is no certainty or assurance whatsoever that these discussions will result in any transaction”. The announcement on potential takeover offer led to a massive surge in Tat Hong’s share price the next day. The stock rocketed from 41.5 cents to 63.5 cents.

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Is this a value trap or value buy? Before jumping the gun, investors or traders must put things into perspective and evaluate whether Tat Hong’s shares are worth buying or trading. Since 2007, Tat Hong’s share price has tumbled from a high of $3.36 and is now languishing at a 6 year low of $0.58. Faithful investors who bought at the peak in 2007 will be staring at massive losses. Even those who bought Tat Hong’s shares during the 2008’s Great Financial Crisis (GFC) are not better off because prior to the recent potential takeover offer announcement, its share price was trading at similar level to the GFC times. This is a classic example vindicating my belief that sometimes being an investor is riskier than a trader. The longer you exposed your money in the stock market, the higher the risk of wealth destruction.

For Tat Hong’s case, the issues may be two-fold. Firstly, the company is essentially a family business managed by CEO Roland Ng and his seven brothers. To make things even more complicated, there are actually four CEOs managing the company’s business in different geographical areas. With so many Indian chiefs in the company, it is inevitable that staff may be unclear whose instructions to follow. This is probably the reason for Tat Hong facing difficulties in attracting external talents to professionalise its business. After all, the construction and marine are perennially seen as “unglamorous” industry to be in.

Even though the Tat Hong business size is not that huge, it is unable to make swift decision and stay nimble as compared to organization with one figurehead. This has resulted in delayed reaction to the changes in the macro business environment. For example, Australia and Singapore accounted for more than 60% of the Group’s business and with the weak market conditions in these two countries, revenue had fallen 11% to $608.6 million in 2015. So far, there are no clear plans announced by Tat Hong to tackle this problem except selling its non-core assets since 2014.

The second issue is actually related to the first one. Due to the fact that Tat Hong is a family business with many family members on-board, an internal fund has also been set up to allow family members to venture into businesses in other areas. This has resulted in the classic symptom of “de-worsification” – using stakeholders’ capital to involve in non-core businesses, resulting in overall poorer company’s performance. Probably realizing this mistake, the company started to divest its non-core subsidiaries, such as Hup Hin Transport, Tat Hong Flo-Line, Kian Ho Bearings and four properties in Australia.

The key financial ratios for the past three years reflect the challenging environment in which Tat Hong is operating in. Return on Equity (ROE) has consistently fallen from 10.2% in 2013 to 4.85% in 2014 to 0.748% in 2015. For its revenue, there were negative growths of 18.2% experienced in 2014 and 11.0% in 2015. In terms of financial strength, Tat Hong is doing reasonably alright but need to keep an eye on its ballooning liabilities which came to a massive $726 million. Cash flow is positive in the third quarter, at $5.9 million but at the rate it is going, it is likely that Tat Hong will announce a loss for the full year results.

While Tat Hong is not in crisis mode, at not least not yet, it is not in a good shape either. Thus, it is unlikely that its potential suitor will pay a premium for the takeover. Henceforth, I see the surge in price as a hype by overly optimistic investors.

As a Singaporean, of course I hope the takeover will not result in the delisting of Tat Hong. The company is after all a home-grown company and it will be a pity to see its demise. Nonetheless, the market is not the place to be emotional. Investors or trading hoping to make money from Tat Hong must first determine its intrinsic value and then set entry/exit level.

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