Weak performance except for Tower Cranes. With the exception of its Tower Crane division, all segments recorded lower revenue and gross profits in 4Q09. In particular, the group's Equipment Sales segment recorded sharply lower sales on lacklustre capital spending among its customers. Revenue from this segment slid by 67.9% YoY, while gross profit registered a 74.3% fall. Management expects equipment sales to deteriorate further. On a brighter note, the Tower Crane division turned in a 119.0% surge in revenue as well as a 54.2% improvement in gross profit. We expect this division to support the group's performance in FY10 given the strong demand for tower cranes in China. Strength from this division, however, will not beable to offset the overall decline given that it constitutes only 4.3% of the group's gross profit.
No clear signs of recovery yet. While pump-priming activities will cushion Tat Hong from the full impact of the global recession, the group is not immune from the downturn. The outlook of Australia's construction industry, which forms the bulk of its revenue, remains shaky with experts predicting further declines in construction activity (exhibit 1). We have raised our margin assumptions as the group has demonstrated its ability to sustain its margins. Nevertheless, we are projecting a 24.5% contraction in FY10 core net profit to S$71.1m as we expect revenue to recede. While we are confident that Tat Hong is poised to ride out these challenging times, we are of the view that it shares have run ahead of fundamentals, and are downgrading our rating to SELL. Our valuation has been rolled over to FY10F NTA and our peg has been raised to 1.3x (from 1.0x) in line with the re-rating of its peers, bringing our fair value estimate to S$0.99 (from S$0.72).
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