Tat Hong - Preference Share Issuance Is A Positive

Reiterate Buy — We view the CRPS issuance positively: 1) provides additional capital to embark on a more aggressive M&A strategy in China and Australia, leveraging on TAT’s M&A execution capability; 2) good record of AIF Capital identifying value and growth in its investment commitments; 3) terms of the agreement suggests AIF Capital’s shareholding commitment is not short term.

Details — TAT is raising net proceeds of S$63.5mn from the issuance of 65mn Convertible Redeemable Preference Shares at S$1.00 each to AIF Capital. ~80% of the proceeds will be used for expansion of its Australian and China businesses. The agreement is structured such that the net impact to ordinary shareholders is quite similar to that of undertaking a private placement, but without the requirement of mark-to-market accounting by TAT or AIF.

Background — AIF Capital is an independent private equity firm headquartered in HK, and oversees a broad-based investment portfolio. Established in 1994, AIF has received investor commitments for its funds, including co-investment, in excess of US$1.5bn. While performances of its private equity investments are unavailable, its investments in Singapore-listed companies suggest a good record in identifying value and growth investments.

Impact – We factor in 11.4% EPS dilution for TAT resulting from the CRPS issuance, ceteris paribus. Our TP is unchanged despite our lower EPS est. as we raise our FY10E PE multiple from ~10x to ~11x (above the historical average PE since 2001), justified by more aggressive M&A strategy. Assuming all CRPS are converted, management will still control TAT with a 51% majority.

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