Buy

Core Australian market holding well; growth thesis intact

What's changed

Following a conference call with management of Tutt Bryant (Tat Hong?s

listed Australian subsidiary) on their FY2007 results, we stay positive on

Tat Hong?s core market Australia (which contributes 60% to Tat Hong?s

FY2007E revenue). Key takeaways are (1) in addition to the encouraging

2HFY07 performance from its distribution and crane rental businesses,

partial contribution of A$0.5mn from earnings accretive acquisitions

(mainly from North Sheridan) lifted full year results; (2) while the lackluster

construction activities in NSW continue to drag its general hire and other

operations earnings, an improvement in performance is expected with the

restructuring and re-deployment of assets within Kingston Industries and

the disposal of loss-making civil construction activities in April 07; (3)

strategic acquisitions, albeit of a smaller scale, in crane and general hire

should continue to drive growth going forward.

Implications

We maintain a Buy rating on Tat Hong as the positive outlook for Tutt

Bryant confirms our view that its core Australian market will continue to

provide a resilient, steady earnings base, bolstering growth in other

markets namely Singapore in the near term, and China and Middle East in

the long term. Key catalysts for the shares, in our view, would be strong

interim results showing evidence of the strength of the regional heavy

construction cycle and the company?s higher pricing power, and

acquisition announcements in Australia and China.

Valuation

We maintain our 12-month target price of S$2.21 based on DCF

methodology, using a WACC of 7.8% and terminal growth rate of 3%.

Key risks

(1) Hard landing of China and other BRIC economies which could cause a

collapse of the infrastructure and oil and gas boom; (2) weaker-thanexpected

demand of end markets; (3) expensive acquisitions.