Time To Separate The Wheat From The Chaff

Despite the US Congress’ recent approval of a mammoth US$700b bailout package, global stock markets continued their rapid descent.

On 6 October, Singapore’s equity barometer Straits Times Index dived 5.6% to a 3-year low of 2,168.32, amidst warnings of an economic slowdown for the nation coupled with rising unemployment. Elsewhere, panicked investors sparked another major sell-off on Wall Street, forcing the Dow to close below the key 10,000 psychological support at 9,955.50, a level last seen in 2004.

Opting to take a more optimistic view, whatever comes down must go up. That is to say, once the market has reached its bottom, the only direction for it to go is up. But rather than trying to predict where the bottom might be, investors should return to basics and focus on fundamentals.

Local equities across the board have no doubt plummeted to enticing valuations. However, this is the time to separate the wheat from the chaff. It definitely pays for investors to do their homework conscientiously and sieve out those fundamentally stronger blue chips and mid caps, as these would generally be the ones that would lead the way in the event of a market rebound. In regards to this, two particular counters have caught my eye.

Lord Of The Cranes
Since the start of the year, Tat Hong Holdings has witnessed billions of dollars being wiped off its market capitalisation. From a high of $3.47 on 4 January, the world’s largest crane company (in terms of fleet size of crawler cranes) went on a free fall. As at the time of writing, it is gyrating at the $1 mark, translating to a 25% premium over its net asset value (NAV) of $0.80.

It is obvious that in gloomy times like these, investors choose to throw fundamentals out of their windows, as Tat Hong’s financial track record has been rather solid. From FY05 to FY08, the company’s top and bottom line grew at a compounded annual growth rate (CAGR) of 27.5% and 63.4% respectively. Underpinned by a 39% revenue rise to $191.3m and stable gross margin of 36.8%, Tat Hong raked in net profit of $29.2m for 1Q09, a 69% jump year-on-year (y-o-y). Notably, this is its highest-ever first quarter showing to date.

Having expanded its geographical footprint in Australia and China through various acquisitions and joint ventures, Tat Hong appears poised to benefit from the crane and equipment supply shortage situation in the region, which has shown no signs of abating. Meanwhile, ongoing and impending major projects in Singapore such as the Sports Hub, MRT lines, Youth Olympic village as well as oil & gas projects at Jurong Island & Pulau Bukom should continue to sustain demand for the company’s cranes and equipment.

Owning a 20%-stake in PRC-based tower crane manufacturer Yongmao Holdings, which is also listed on the SGX Mainboard, Tat Hong is trading at a historical PE of a mere 5.6x. Its mouth-watering yield of 7.6% also provides an excellent buffer for any further downside.

Master Of The Seas
Similar to Tat Hong, Ezra Holdings has also been unjustifiably battered as a result of the financial turmoil. During the year, the leading integrated offshore support and marine services provider in the offshore oil & gas industry plunged from a high of $3.32 on 2 January to $0.99 as at the time of writing. This represents a slight 4.2% premium over its NAV of $0.95.

Compared to Tat Hong, Ezra’s financial track record looks even more impressive. From FY04 to FY07, Ezra’s turnover grew at a CAGR of 70.4% while its net earnings grew at a CAGR of 88.6%. For the nine months ended 31 May 2008, the company posted a remarkable 101% y-o-y revenue surge to US$149.1m largely attributable to the robust offshore chartering and engineering fabrication markets. More importantly, its net profit of US$168.7m has way surpassed the US$68.2m achieved for the whole of FY07.

As at 19 March 2008, Ezra held a 15.5%-interest in Catalist-listed Ezion Holdings, formerly known as Nylect Technology. Following the complete disposal of its fabrication, mechanical and electrical business in December 2007, Ezion presently focuses on providing offshore marine logistics and support services.

In a bid to further boost its earnings, Ezra is steadily increasing and fine-tuning its fleet to meet the arduous demands of the offshore oil & gas sector. Armed with a respectable 3.6% yield, the company is trading at an undemanding historical PE of 6.3x. Furthermore, its debt to equity ratio has decreased from 0.9x as at 31 August 2007 to 0.3x as at 31 May 2008.