Year In Review
Tat Hong entered the new year confidently, in anticipation of a gradual recovery from a difficult prior year. Unfortunately, a series of unexpected natural occurrences and continuing competitive operating conditions hampered its recovery route.
In spite of various challenges the Group faced, the Group performed better operationally than the prior year if one-off impairments and other exceptional items were excluded from the profits of both fiscal years.
The overall improved performance was evidenced by the 18% revenue increase to S$584.2 million in the fiscal year ended March 31, 2011 ("FY2011") from S$495.4 million in the previous corresponding period ("FY2010"). All of the Group's core business segments registered double-digit revenue growth, with the exception of the General Equipment Rental which was impacted by a weaker performance in the first half of FY2011.
Accordingly, the Group's gross profit improved 9% from S$190.9 million in FY2010 to S$208.5 million in FY2011. However, margin compressions arising from keen competition and increased manpower requirements for the Group's expanded operations eroded gross profit margin by 2.8 percentage points, from 38.5% in FY2010 to 35.7% in FY2011.
In FY2011, the Group also benefitted from a better performance from its associates and joint ventures. The Group's share of associates' profits grew 31% from S$1.0 million in FY2010 to S$1.3 million in FY2011, and share of joint ventures narrowed its losses from S$3.0 million in FY2010 to S$0.6 million in FY2011. Performance from the Group's associates would have been stronger with the exclusion of a one-off impairment of S$6.9 million in the investment in an associate recorded in FY2011.
The improved results from the Group were partially dampened by an increase of 28% in total operating expenses, which rose from S$128.9 million in FY2010 to S$164.5 million in FY2011. The 14% increase in distribution expenses to S$13.2 million in FY2011 was in line with revenue growth, but this was partially offset by net recovery of debts provided for in previous fiscal years. Administrative expenses increased 24% to S$13.7 million, mainly due to legal and professional fees incurred during the acquisition process of the remaining 30% stake in the Group's Australian subsidiary, Tutt Bryant Group Limited. Legal costs were also incurred in China in relation to collection of debts and an ongoing civil suit against an ex-general manager of a Chinese subsidiary. The addition of more subsidiaries to Tat Hong in FY2011 was another contributing factor to the rise in administrative expenses. Also, as a mark of solidarity with the Group's treasured Japanese suppliers, a donation of S$300,000 was made to the Singapore Red Cross Society in aid of relief funds offered for the Japan earthquake and tsunami crisis in March 2011. This donation was recorded under the Group's administrative expenses for FY2011.
The bulk of the increase in total operating expenses in FY2011 was derived from the Group's other operating expenses, which jumped 29% from S$106.3 million in FY2010 to S$137.6 million in FY2011. Higher staff cost arising from the acquisition of new subsidiaries, reinstatement of salaries after the cost-cutting in FY2010 and ramping up of resources in anticipation of increased activity in Australia was one major factor. In Australia, a one-off impairment of goodwill in the Group's General Equipment subsidiaries and non-operating losses related to the flood in January 2011 impacted overall expenses. Losses arising from the flood was partially offset by an insurance claim recorded under the Group's other operating income in FY2011.
These cumulated to a net profit after tax and minority interest of S$26.0 million in FY2011, a 33% decrease from S$38.6 million achieved in FY2010. Excluding one-off items in FY2011 relating to goodwill impairment, net loss from flood damage in Australia and acquisition of subsidiaries, the Group's attributable net profit would have been S$38.3 million.
The Group's balance sheet remained sound as at end March 2011 despite an increase in net gearing to 0.75 times. The higher gearing was necessary to fund the acquisition of new equipment, especially heavylift cranes, as well as for the remaining 30% stake in Tutt Bryant Group Limited and new 70%-owned subsidiary, Hup Hin Transport Co Pte Ltd, both of which are expected to benefit the Group's performance in future years. Cash position remained healthy at S$61.8 million as at March 31, 2011.
Australia continued to be the Group's key revenue contributor in FY2011, contributing S$314.9 million, or 54%, to the Group's overall revenue. 35% of the Group's total revenue came from ASEAN, which contributed S$202.9 million in revenue. China continued to narrow the gap, contributing S$57.2 million to Group revenue and increasing its revenue contribution share from 6.8% in FY2010 to 10.0% in FY2011. The other regions accounted for the remaining 1%, or S$9.2 million, of the Group's overall revenue.
Distribution Delivers Consecutive Quarters Of Growth
In the first quarter of FY2011, the Group combined reporting for its Equipment Sales and Parts & Services divisions under a single segment – Distribution. The Group's core revenue generator, this division did not disappoint with four consecutive quarters of revenue increase, cumulating to a 22% climb in overall revenue to S$272.4 million in FY2011. The laudable results were achieved through improved performance from the Group's Distribution arm in Singapore, which achieved higher sales to equipment traders, equipment owners and end users in the local and regional markets, as well as in Europe. Higher sales of excavators to Vietnam and Indonesia were also recorded in FY2011. In Australia, the second half of FY2011 had a weaker showing with lower sales of general construction equipment due to the cessation of government tax investment allowance schemes. A strong first half in FY2011 from Australia owing to favourable currency translation and a backlog of deliveries of orders placed in the fourth quarter of FY2010 bumped up overall results that were comparable to FY2010.
The Right Focus On Crane Rental
The Group's strategic focus on continual expansion of its crane rental fleet at a sustainable pace has paid off over the years. FY2011 marked another year of growth for the Crane Rental division with a 12% revenue increase to S$184.9 million. Along with the expanded fleet size, coupled with improved market sentiments, the Group experienced higher activity levels in Australia for some key projects in the desalination, mining, oil and gas and infrastructure industries. The Australian arm for Crane Rental also benefitted from commencement of some major projects that were previously deferred in FY2010. Hong Kong was another star performer for this division, in line with the Group's participation in notable infrastructural developments such as the Express Rail Link, Highway extensions and a Macau casino. However, the scaling down of a major oil and gas project in Singapore and the completion of major projects in Malaysia pulled down revenue contributions from these two countries, impeding a possible better overall performance from this division.
General Equipment Rental Regains Pace
It was a year of lows and highs for the Group's General Equipment Rental division. Weak market conditions in the first half of FY2011, especially in New South Wales, Australia, dampened this division's results. In addition, one quarter of revenue contribution from the significant Railcorp contracts, which was winding down in early FY2010, further widened the revenue variance between the first half periods of both fiscal years. An encouraging turnaround in the second half of FY2011 alleviated overall results to a marginal 3% revenue drop to S$69.7 million in FY2011. Increased demand in Queensland, improvements in the Group's network in New South Wales and the opening of new branches in Victoria and Western Australia were contributing factors to a healthier second half performance.
Tower Crane Rental Maintains Growth Track
The Tower Crane Rental division pushed on with another year of excellent revenue growth at 70% to S$57.2 million in FY2011. The full-year contributions from two new subsidiaries, Beijing Tat Hong Zhaomao Equipment Rental Co., Ltd. and Sichuan Tat Hong Yuan Zheng Machinery Co., Ltd., partially accounted for the impressive growth. In addition, a significantly bigger fleet size of 684 tower cranes with the inclusion of the two new subsidiaries as well as organic expansion of China Nuclear Huaxing TatHong Machinery Co., Ltd propelled revenue on an uptrend as well.
Focused On The Future
It was unfortunate that the Group's determination to kickstart its recovery route this fiscal year was shaken by unexpected setbacks due to natural occurrences and the external operating environment. Nonetheless, Tat Hong remains hopeful of a more positive outlook in the near future on the back of prospects presented by regional economies.
Australia, the Group's key market for revenue, witnessed modest economic growth in the three months to December despite widespread flooding. According to the Australian Bureau of Statistics, the biggest contributor to annual growth year-to-date was private spending on machinery and equipment, and inventories. Pre-estimates also showed that Australia's annual growth was likely to maintain its current pace as the massive A$380 billion pipeline of mining investments counters weakness in the manufacturing and retail industries1.
The unprecedented flood that happened in December 2010 indeed took many organisations by surprise, but the Group's Australian subsidiary, Tutt Bryant Group Limited ("TBG"), swiftly implemented several preventive measures which controlled total damage cost for the Group. Tat Hong is cautiously optimistic that there will be business opportunities coming through from a proposed A$1.8 billion income tax to help fund reconstruction in flooddevastated Queensland2. In addition, Queensland currently holds the bulk of infrastructure spending in Australia, according to the Investment Monitor report from Deloitte Access Economics. On top of the ongoing Gladstone liquefied natural gas project, which TBG is participating in, billions have also been committed to engineering projects such as Brisbane's Airport Link and the Gold Coast light rail. Should all committed projects proceed smoothly without further setbacks in the upcoming year, Australia remains a promising market to boost the Group's overall performance in the next fiscal year.
Closer to home, growth in the construction sector in Singapore continued in 2010, albeit at a more modest pace of 6.1% compared to 17.1% in 20093. Several major infrastructure developments and some of Jurong Island's oil and gas projects were completed over the year, moderating growth levels to a sustainable pace. Nevertheless, the local market is expected to continue thriving on investment of S$60 billion into the city-state's suburban metro system over the next 10 years, as well as growth opportunities in the power generation sector. Cumulatively, Singapore's construction sector is forecast to average growth of 6.8% per annum between 2011 and 2015, bringing total sector value to S$22.4 billion by 20154.
Similarly, Malaysia witnessed the completion of some key onshore and offshore oil & gas related projects, tapering growth towards the end of 2010. Recently, under the Economic Transformation Programme, the Malaysian government set out plans to expand the urban railway network in the Klang Valley. Malaysian Prime Minister Najib Razak also announced plans to build its own version of Singapore's Jurong Island, supported by oil and gas projects worth RM20 billion in Pengerang, Johor5. All these spell windows of business opportunities for Tat Hong in Malaysia.
The Group continues to look upon favourably on other regional markets; in particular, Hong Kong and more recently, Papua New Guinea. Capital expenditure on infrastructure in Hong Kong, especially in the transport sector, has increased on the back of fiscal measures launched by the government to combat global recession6. The Group is currently involved in three prominent infrastructure and transport developments and will continue to strive for a share in more upcoming projects to build up its reputation in the budding market. Papua New Guinea holds a promising outlook for our crane rental division as well, due to lucrative liquefied natural gas projects which have commenced and are estimated to inject more than A$20 billion into the country's economy7. According to research and investment firm Sanford C. Bernstein & Co., the country remains underexplored and under-appraised, and the possibility of multi-trillion cubic feet discoveries could underpin future LNG projects.
Supported by five subsidiaries and a new investment holding company, Tat Hong Zhaomao Investment Co., Ltd, in China, Tat Hong will now focus on organic growth to tap into abundant opportunities under China's 12th Five Year Plan. Under the new plan, China has budgeted for a further 85,000km of highways and 40,000km of high speed rail to be developed. Investments in the construction of new railways will reach RMB3.5 trillion according to the Ministry of Railways. In the energy and utilities sectors, the focus will be on efficiency and low carbon generation, with nuclear and renewable energy featuring strongly in the projects pipeline8. All these continue to place China positively for the Group's strategic expansion of its tower crane rental operations.
Tat Hong's continual focus on investing in the future amidst an unexpected rocky year has led the Group well, and this will continue to lead us towards a promising future.
1 Herald Sun, May 26, 2011
2 The Wall Street Journal, January 27, 2011
3 Channel NewsAsia, February 17, 2011
4 Business Monitor International, March 2, 2011
5 The Business Times Singapore, January 12, 2011
6 Business Monitor International, April 14, 2011
7 Australian Broadcasting Corporation, November 3, 2010
8 Business Monitor International, May 6, 2011
