Stabilising outlook. To recap, Tat Hong posted a 35.4% YoY slide in its core 4Q08 net profit as the recession weighed on revenue and gross profits across almost all its business segments. In particular, equipment sales recorded a steep plunge as customers scaled back on capital investments in the absence of credit availability. Thankfully, the group's overall performance was supported by rental income, which continued to be fairly resilient despite the downturn (exhibit 1). While we are not expecting a marked improvement in its upcoming 1Q10 performance, the brightening economic outlook, gradual pick up in private sector construction activity, as well as the pipeline of projects from government pump priming initiatives suggest that the sector outlook could be stabilising. Furthermore, with rental income forming 73% of the group's gross profit, Tat Hong's earnings will be fairly resilient to volatility stemming from equipment sales.
Still too early to call for a recovery. Tat Hong is expected to release its 1Q10 results on 14 Aug 2009. Key aspects to note include its rental rates, utilisation levels and equipment sales. We are projecting a 10% fall in crane rental rates in FY10 as demand has weakened from a year ago. In addition, we expect equipment sales to post a steep YoY drop given its record high performance in 1Q09. While the overall outlook for the construction industry appears to be stabilising, we reiterate that it remains premature to call for a recovery in the near term. Hence we maintain our S$0.99 fair value estimate. We will turn buyers at S$0.90 and below.
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