This article is our thoughts with regards to the SGX announcement here with regards to the pre-conditional voluntary conditional cash offer by Tat Hong Holdings.
Tat Hong Holdings was a company that we once looked before given how we believe that after the property cycle it would lead on to the construction cycle. I have attached Tat Hong’s historical price to book ratio chart below. It too shows the average price to book ratio along with the +/- 1 standard deviation.
Tat Hong Holdings is a crane owning company engaged in investment holding. The Company’s segments include Crane Rental, Tower Crane Rental, General Equipment Rental and Distribution.
- The Crane Rental Segment receives rental income of cranes
- The Tower Crane Rental Segment receives rental income of tower cranes
- The General Equipment Rental Segment receives rental income of other construction equipment
- The Distribution Segment is engaged in the sale of cranes and other construction equipment, spare parts, and provision of other ancillary services
Prior to the run up in valuations in FY2013, Singapore was experiencing a property boom due to the lack of housing supply. Tat Hong’s revenue was also increasing up till FY2013, resulting in the valuations running up. As with all good times, management would over expand, thinking that the good times will always last. Come FY2014 when Singapore’s property industry started slowing down, influx of housing supply and government intervention, this led to the decrease in revenue and in turn the fall in Tat Hong’s valuation. Due to Tat Hong’s over expansion during the good times, this resulted in excess inventory.
Over the last couple of years, Tat Hong started controlling capital expenditures, selling off under-utilised assets and reducing their debt levels.
Why Didn’t We Invest
When we looked, valuations was cheaper at c0.44x BV and there were many positive signs. We believed that the market was turning, the company was doing all the right steps in terms of reducing debt and inventory levels. However, its debt to equity level was still too high at c.76.7%. Essentially, the equity markets was pricing it with the risk of default.
Fast Forward Today
With the cash offer of SGD 0.50, it puts the company at approximately. 0.63x BV. Looking at the historical price chart and the capital cycle, it is a 20% discount to its average historical price to book ratio. It is in my opinion that this undervalues the company, especially given how the company and industry is moving in the right direction.