It has been sometimes since I reviewed the performance of Tat Hong and I was shocked to find out that the stock had plummeted to almost a five year low. The stock is currently trading at $0.52, barely above the $0.49 recorded in September 2015.
For a company that prides itself as the largest crane company in Asia Pacific and seventh worldwide, its recent stock price indicates that all is not well for Tat Hong.
In the 2015 annual report, the revenue declined 11% to S$608.6 million whilst operating profit (excluding impairment charges) remained flat at S$35.7 million comparable to the net profit achieved in FY2014. Profit after tax and minority interests (PATMI) dipped 85% to S$4.9 million due to non-cash goodwill and asset impairment charges of S$30.8 million taken by the Group’s Australian subsidiaries. One reason for Tat Hong’s terrible performance could be that its business is too concentrated in Australia and Singapore markets, which together accounted for 60% of the Group’s business. Thus, any headwind in these markets can spell big trouble for the company.
Perhaps another tell-tale signs that a company is not doing well is that it is selling its assets. In 2015, Tat Hong disposed its properties in Australia, equipment as well as selling off several “non-core subsidiaries”, Hup Hin Transport and Tat Hong Flo-Line, and an associate, Kian Ho Bearings. In total, the Group realised proceeds of S$89.1 million from its divestment programme. Whilst this streamlining initiative can help to unlock value for Tat Hong, it also underlies the notion that the company is downsizing its moat. After all, these assets were acquired in the good old days when Tat Hong was growing. Now that the company is experiencing rough patch, it would seem strange that these acquisitions became “non-core” assets all of a sudden? If so, why purchase them in the first place?
As a result of its asset sales, NAV decreased from 1.0989 in 2013, to 1.0765 in 2014 and 1.0371 in 2015. ROE plummeted from 10.204% in 2013 to 0.748% in 2015. To top it off, revenue growth became -11% in 2015 from +16.280% in 2013. The past three years’ data alone was a nightmare and suffice to say, they scare away potential investors.
However, the above news doesn’t mean that Tat Hong is going to fold up anytime soon. In fact, cash flows from operations is still strong in FY2015 of S$141.6 million, S$62.6 million more than the S$79.0 million achieved in FY2014. The improved net cash from operations, together with reduced capital expenditure, resulted in free cash flow generated of S$115.1 million. Another consolation is that the balance sheet remains strong. Current assets rose to S$485.1 million from S$473.7 million a year earlier due primarily to an increase in cash and cash equivalents. Total liabilities decreased to S$795.8 million as at 31 March 2015 from S$846.5 million a year ago.
Outlook for Tat Hong remains murky and it certainly takes a very brave investor to enter this counter. Weakness in Australia and Singapore market will continue to have adverse impact on Tat Hong in 2016. Unless it accelerates its growth momentum in China or new markets, performance is expected to be lacklustre in the coming year. Furthermore, China is slowing down as well. Henceforth, it remains to be seen whether Tat Hong would be affected as well. Overall, the investment outlook for Tat Hong remains challenging and investors should trade with care. At a PER of 67.10, this counter is way too overvalued and therefore, the price should continue to slide if earning continues to be dismal.
Not vested in this counter at the moment but is monitoring the situation. Enjoy the ride.
SG Wealth Builder