Tat Hong Fundamental analysis
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Author - Melynn,
Singapore Stocks,
Stock - Tat Hong,
Technique - Fundamental
Background
Mainboard-listed Tat Hong Holdings Ltd ("Tat Hong" or the "Group") is one of the largest crane companies in the world - ranked number one in terms of fleet size of crawler cranes, fourth in terms of total number of cranes owned, and seventh in terms of aggregate tonnage. In the Asia-Pacific region, it is undisputably the largest crane company, with its fleet size ranging from 50-1000 ton cranes.
Established in Singapore in the 1970s, Tat Hong is principally engaged in five core activities - rental of cranes, rental of towercranes, rental of general equipment, sale of cranes and other heavy equipment, and sale of spare parts for these equipment. It serves diversified industries, including infrastructure, oil & gas, mining, construction and engineering sectors, across a geographical footprint that stretches over Australia, Singapore, Southeast Asia, Indo-China, India, Middle East and China. Tat Hong currently has a combined rental and sales inventory fleet of over 600 mobile crawler cranes. The Group enjoys a number of exclusive distributorship agreements for cranes and other heavy equipment with companies such as Hitachi-Sumitomo, Sumitomo, Yanmar, Bomag, Kato, Mustang, Kawasaki, Mitsubishi and Linkbelt.
Following the listing of its Australian subsidiary, Tutt Bryant, on the Australian Stock Exchange in December 2005, Tat Hong had actively acquired, through Tutt Bryant, a number of companies, including Kingston Industries, Bay Hire, Muswellbrook, North Sheridan and the rental business of Bradshaw Ultra Heavy Haulage, extending its presence and increasing its market share in its crane and equipment rental businesses in Australia.
The Group has significantly expanded its presence in China, building on its interest in Fushun Yongmao, a towercrane manufacturer listed in Singapore, and its foreign-sino joint-venture company, Shanghai Tat Hong Equipment Rental Co. Ltd. In January 2007, Tat Hong entered into a joint venture with China's largest towercrane rental company, Beijing ZhongJian Zhenghe Construction Machinery, followed by the acquisition of China Nuclear Huaxing TatHong Machinery Construction in April 2007. In February 2008, Yongmao Holdings Limited, the Group's 20%-owned associated company, was successfully listed on the Main Board of the Singapore Exchange Securities Trading Limited ("SGX-ST").
Quantitative Analysis
Below are the basic qualitiative analysis I have done for Tat Hong and based on the factors, I will consider buying between the range from 0.52 to 0.55 and consider selling at0.70 in the coming months assuming no major change in the fundamentals.
Summary
| Discount Rate | Grade | |
| Profitability | 2/4 | B |
| Growth | 1/3 | A |
| Financial Health | 2/5 | A |
Cash Flow | 4/8 | B |
| Effiency | 2/5 | A |
Detailed Quantitative Analysis
Profitability
1. Has the company been generating free cash flow consistently.
Tat Hong has had a pretty good history of generating free cash flow. Free cash flow is negative in year 2003 and 2004 but has recorded a good growth on the following years. It is still not consistent as they are still plowing most of their money back to capital expanding and this is not a good sign that the firm has much of an economic moat.
Profitability
1. Has the company been generating free cash flow consistently.
Tat Hong has had a pretty good history of generating free cash flow. Free cash flow is negative in year 2003 and 2004 but has recorded a good growth on the following years. It is still not consistent as they are still plowing most of their money back to capital expanding and this is not a good sign that the firm has much of an economic moat.
2.Has the company generated a consistant increase of operating profit margin and net profit margin
Company' net profit/operating profit margin has decreased from 21% to 20% but prior to that, they have been increasing consistently.
3. Is the company's ROE more than 10%
Tat Hong's 2008 ROE is 27% and has been increased consistently.
4. Did the company increase financial leverage agressively to get a high ROE
Tat Hong's financial leverage has decreased from 2.08 to 1.88 therefore the ROE is of highest quality.
5. Is the company's ROA more than 8%
Tat Hong's 2008 ROA is 13% and has been increased consstently.
6. Has the company's operating expense increased drastically over the years
The company total expense is steady at 16 to 17% of sales until year 2008 when it increased to 19%.
7. Is the company's inventory rising faster than sales
Inventory has increased 26 % from last year while sales increased 32%. Although there are exceptions but on the safe side, its better to take this point into consideration because when a company produces more than its selling, either demand has dried up or the company has been overly ambitious in forecasting demand. Unsold goods will have to get sold eventually,
8. Has the company's receivables percentage of sales increased more than 20%
Account receivables increased from 11 percent of sales to 13 percent which is a growth of 18%.
Conclusion : With the likely downturn of the economy, it will definitely affect the crane business therefore I will conservatively grade the profitability as B due to the inconsistent generation of free cash flow and also inreasing of total expense.
Company' net profit/operating profit margin has decreased from 21% to 20% but prior to that, they have been increasing consistently.
3. Is the company's ROE more than 10%
Tat Hong's 2008 ROE is 27% and has been increased consistently.
4. Did the company increase financial leverage agressively to get a high ROE
Tat Hong's financial leverage has decreased from 2.08 to 1.88 therefore the ROE is of highest quality.
5. Is the company's ROA more than 8%
Tat Hong's 2008 ROA is 13% and has been increased consstently.
6. Has the company's operating expense increased drastically over the years
The company total expense is steady at 16 to 17% of sales until year 2008 when it increased to 19%.
7. Is the company's inventory rising faster than sales
Inventory has increased 26 % from last year while sales increased 32%. Although there are exceptions but on the safe side, its better to take this point into consideration because when a company produces more than its selling, either demand has dried up or the company has been overly ambitious in forecasting demand. Unsold goods will have to get sold eventually,
8. Has the company's receivables percentage of sales increased more than 20%
Account receivables increased from 11 percent of sales to 13 percent which is a growth of 18%.
Conclusion : With the likely downturn of the economy, it will definitely affect the crane business therefore I will conservatively grade the profitability as B due to the inconsistent generation of free cash flow and also inreasing of total expense.
Growth
1. Is the company's sales growth more than 15%
Tat hong's sales has grown at an annual growth rate of 27% over 7 years.
2. Is the company's operating income growth more tha 15%
Tat hong's operating income has grown at an exploding rate of 68% over 7 years.
3. Is the company's net profit growth more than 15%
Tat hong's net income has grow at an exploding rate of 79% over 7 years.
Conclusion : Will expect a decline in growth due to the possible demand crunch but looking on a longer time horizon, I will still grade the growth A.
Financial Health
1. Is the company's sales growth more than 15%
Tat hong's sales has grown at an annual growth rate of 27% over 7 years.
2. Is the company's operating income growth more tha 15%
Tat hong's operating income has grown at an exploding rate of 68% over 7 years.
3. Is the company's net profit growth more than 15%
Tat hong's net income has grow at an exploding rate of 79% over 7 years.
Conclusion : Will expect a decline in growth due to the possible demand crunch but looking on a longer time horizon, I will still grade the growth A.
Financial Health
1. Is the company's financial leveage more than 3
Tat hong's financial leverage has been decreasing consistently over the past 7 years and it is at 1.88 in year 2008. This means that for every dollar in equity, the firm had $1.88 in assets. It borrowed the other 0.88. This is fairly conservative for a company which generates such high ROE.
2. Is the company's debt to equity between 0.5 to 1.5 or smaller.
Tat Hong's debt to equity is at 0.88 and been decreasing consistently over the years too.
3. Is the interest coverage more than 5 and been increasing consistently
Tat Hong's interest coverage has been improving over the years and it is at 12.99 in year 2008. In other words, Tat Hong has earned enough money to cover its interest obligation 13 times over, which is a pretty safe margin.
Tat hong's financial leverage has been decreasing consistently over the past 7 years and it is at 1.88 in year 2008. This means that for every dollar in equity, the firm had $1.88 in assets. It borrowed the other 0.88. This is fairly conservative for a company which generates such high ROE.
2. Is the company's debt to equity between 0.5 to 1.5 or smaller.
Tat Hong's debt to equity is at 0.88 and been decreasing consistently over the years too.
3. Is the interest coverage more than 5 and been increasing consistently
Tat Hong's interest coverage has been improving over the years and it is at 12.99 in year 2008. In other words, Tat Hong has earned enough money to cover its interest obligation 13 times over, which is a pretty safe margin.
4. Is the company's current ratio more than 1.5 and less than 6
If a company has an excessive high current ratio, it can probably sound some alarm bells because it indicates that the company has a large amount of current assets that could - and probably should - be invested back into the company . Tat Hong's current ratio is at 1.39 in year 2009 and they have managed to maintain it above one over the past 5 years. Even though the 1.5 mark is not met but this level is still relatively safe.
If a company has an excessive high current ratio, it can probably sound some alarm bells because it indicates that the company has a large amount of current assets that could - and probably should - be invested back into the company . Tat Hong's current ratio is at 1.39 in year 2009 and they have managed to maintain it above one over the past 5 years. Even though the 1.5 mark is not met but this level is still relatively safe.
5. Is the company's quick ratio more than 1
This figure is not really meaningful if used alone as it needs to be compared with other companies in the same industry but generally, a quck ratio higher than 1 puts a company in fine shape.
Cash Flow
1. Is the company able to generate improving/consistent operating cash flow to sales
Tat Hong's ocf/sales for Fy06,07,08 is 6.51%, 6.27% and 10.12%. They have shown improvement but it is still not consistent.
This figure is not really meaningful if used alone as it needs to be compared with other companies in the same industry but generally, a quck ratio higher than 1 puts a company in fine shape.
Cash Flow
1. Is the company able to generate improving/consistent operating cash flow to sales
Tat Hong's ocf/sales for Fy06,07,08 is 6.51%, 6.27% and 10.12%. They have shown improvement but it is still not consistent.
2. Is the company able to generate improving/consistent free cash flow to operating cash flow
Tat hong's free cash flow to operating cash flow for Fy06,07 and 08 is 17%, 68% and 38%. The recent plunge is due to the increased of capital expenditure. There is no guideline for this but generally, the higher percentage of free cash flow, the greater the financial strength of the company.
3. Is the company's cash flow coverage improving
The following are the various cash flow coverage I'm covering.
Tat hong's free cash flow to operating cash flow for Fy06,07 and 08 is 17%, 68% and 38%. The recent plunge is due to the increased of capital expenditure. There is no guideline for this but generally, the higher percentage of free cash flow, the greater the financial strength of the company.
3. Is the company's cash flow coverage improving
The following are the various cash flow coverage I'm covering.
| FY05 | FY06 | FY07 | FY08 | |
Short term Debt Coverage | 0.06 | 0.15 | 0.14 | 0.23 |
Capital Expenditure Coverage | 0.64 | 1.21 | 3.28 | 1.63 |
Dividend Coverage | 1.20 | 2.93 | 0.83 | 2.23 |
Capex + Cash Dividend Coverage | 0.42 | 0.85 | 0.67 | 0.67 |
The short-term debt coverage ratio compares the sum of a company's short-term borrowings and the current portion of its long-term debt to operating cash flow. Tat Hong's short term debt coverage has been improving consistenly thorughout the past 4 years and this is a good sign.
The capital expenditure coverage ratio compares a company's outlays for its property, plant and equipemtn(PP&E) to operating cash flow. Tat Hong's capital expenditure coverage has been increasing for the past 3 years till last year where it plunged quite substaintally due to increase of capital expenditure.
For conservative investors focused on cash flow coverage, comparing the sum of a company's capital expenditures and cash dividends to its operating cash flow is a stringent measurement that puts cash flow to the ultimate test. If a company is able to cover both of these outlays of funds from internal sources and still have cash left over, it is producing what might be called "free cash flow on steroids". This circumstance is a highly favorable investment quality. Tat Hong's ratio has been hovering at the level below 1 which tells us that they are not able to fully coverage the capex and divided with the generated operating cash flow but nevertheless, the ratio is still at a decent level.
Conclusion : Based on the above, Tat Hong has a good record of generating free cash flow and also its cash flow coverage ratio has been improving over the years but still, its coverage is not at the ideal range and also the free cash growth is inconsistent therefore to be conservative, I will give a B grade.
Efficiency
1. Is the company's cash conversion cycle inproving consistently over the last few years
It is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.
The capital expenditure coverage ratio compares a company's outlays for its property, plant and equipemtn(PP&E) to operating cash flow. Tat Hong's capital expenditure coverage has been increasing for the past 3 years till last year where it plunged quite substaintally due to increase of capital expenditure.
For conservative investors focused on cash flow coverage, comparing the sum of a company's capital expenditures and cash dividends to its operating cash flow is a stringent measurement that puts cash flow to the ultimate test. If a company is able to cover both of these outlays of funds from internal sources and still have cash left over, it is producing what might be called "free cash flow on steroids". This circumstance is a highly favorable investment quality. Tat Hong's ratio has been hovering at the level below 1 which tells us that they are not able to fully coverage the capex and divided with the generated operating cash flow but nevertheless, the ratio is still at a decent level.
Conclusion : Based on the above, Tat Hong has a good record of generating free cash flow and also its cash flow coverage ratio has been improving over the years but still, its coverage is not at the ideal range and also the free cash growth is inconsistent therefore to be conservative, I will give a B grade.
Efficiency
1. Is the company's cash conversion cycle inproving consistently over the last few years
It is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.
| FY05 | FY06 | FY07 | FY08 | |
Days Sales Outstanding (days) | 72 | 58 | 51 | 53 |
Days Inventory (days) | 198 | 177 | 168 | 174 |
Payables Period (days) | 162 | 156 | 159 | 175 |
Cash Conversion Cycle | 107 | 79 | 61 | 52 |
Company's CCC has improved consistently over the years and by looking at each of the figure, Tat Hong is quicker at collecting what is owed, better job at moving inventory and also keeps its own money a bit longer. This consistency indicates the management's effiency in using short term assets and liabilities to generate cash.
2. Is the company's turnover ratios improving consistently over the last few years
| FY05 | FY06 | FY07 | FY08 | |
Receivable Turnover | 5.08 | 6.29 | 7.09 | 6.89 |
Inventory Turnover | 1.84 | 2.06 | 2.17 | 2.10 |
Fixed Asset Turnover | 1.98 | 2.34 | 2.02 | 2.03 |
Asset Turnover | 0.74 | 0.85 | 0.77 | 0.76 |
Like most ratios, the true value of the information isn't really there unless you make a comparison across the industry but generally, the higher, the better.
Conclusion : Based on the ratios above, it shows that Tat Hong has improved on its effiecncy consistently, indicating the management's ability therefore I will give a A grade in this aspect.
Valuation
Multiples
Valuation
Multiples
| Current | Target | Target Price | |
Book Value per share | 0.63 | 0.5 | 0.44 |
Operating Cash Flow per share | 4.38 | 4.00 | 0.51 |
Free Cash Flow per share | 11.36 | 11.00 | 0.54 |
Price Earnings per share | 2.79 | 2.50 | 0.50 |
Price sales per share | 0.44 | 0.40 | 0.51 |
A target price of $ 0.50 is derived based on the average of the multiples above.
DCF
DCF
| Cash flow growth rate | 0.05 | 0.08 |
| Margin Of safety | 0.15 | |
| Overselling rate | 0.13 | |
| Discount rate | 0.14 | 0.12 |
Discount rate of 0.11 derived based on the quantitative fators. Given today's uncertainty, i will set the discount rate as 0.14 from year 1 to year 5 following by 0.12 from year 6 to year 10.
| Per Share Value | 0.62 |
| Margin of Safety | 0.53 |
| Consider Selling | 0.70 |
Reproduction with permission from http://melynn-lynch.blogpsot.com
*Disclaimer : This analysis is personal and is not an inducement to buy or sell shares of Tat Hong Holdings. The author of this blog will not be held responsible for any losses incurred due to the reliance on this article.
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