LIM & Tan Securities has initiated coverage on Sin Heng Heavy Machinery with a “buy” recommendation and a target price of S$0.75, on the belief that the construction equipment rental company is well-positioned to benefit from the industry’s bounceback.

Despite expressing optimism about the stock, Lim & Tan said on Thursday (Nov 17) that its target price is “conservative” at 54.7 per cent below the valuation at Sin Heng’s last peak in FY2013. This is due to Covid-related hindrances on construction activities, as well as labour constraints and workplace safety concerns.

Analyst Ng Yong Rui recommended “buy”, adding that Sin Heng is currently trading at “distressed valuations” for an asset-based machine rental company. Its current trade level implies an enterprise value to earnings before interest, taxes, depreciation and amortisation ratio of one time.

The stock broker expected profit increases in H2 FY2022 and FY2023 as pent-up demand boosts the construction sector. The analyst predicted that the company’s H2 results will outperform those recorded in H1, to bring in a full-year net profit of S$4 million.

Ng noted that since the company shifted its focus to its profitable crane rental business in FY2020, the proportion of revenue from equipment rental rose to 51.8 per cent in FY2021 from 40 per cent the year before. As a result, net profit margin increased to 5.2 per cent in FY2021 from 2.2 per cent in FY2020.

Ng believed that this trend will continue, as the industry at large saw an increase of 40-50 per cent in crane rental rates between 2021 and 2022. He added that several construction companies expect crane rental rates to increase by 15-20 per cent in the next 12 months.

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In addition, Sin Heng is unlikely to see new competitors in the crane rental space. According to Ng, barriers to entry are “extremely high”, and he predicted that an “accelerated rate” of business exits will occur when a S$1.4 billion government support package for the sector expires.

Said the analyst: “It is unlikely that there will be new entrants as the construction equipment business requires a wide range of crane and lifting solutions and a reputable track record. It is also capital expenditure-intensive. We expect the surviving market participants with strong balance sheets such as Sin Heng Heavy Machinery to perform well in the upturn.”

Ng also pointed out that Sin Heng is capable of shielding itself from macro headwinds. In his view, this business is “relatively inflation-proof” as the majority of the cost stems from the purchase of cranes.

The analyst added that Sin Heng can expand its existing fleet by taking advantage of a weaker Japanese yen, which has hit a historic low against the Singapore dollar. Sin Heng spends about S$9.2 million annually rejuvenating its fleet and capabilities. As the company purchases Kobelco and Kato cranes in yen, the weaker currency can help it offset some inflationary pressures.

Ng liked that Sin Heng has a strong balance sheet that supports a shareholder-centric management stance. He highlighted that the company paid out a dividend of S$5.7 million – or S$0.05 per share – in FY2021, representing a payout ratio of 150 per cent.

This was despite Sin Heng not having a dividend policy in place, as well as incurring a four-year high of S$13.8 million in capital expenditure that year. Ng believed that the company can sustain paying out “high” dividends of S$0.05 per share in the near term as profitability increases.

The analyst also hinted at the possibility of Sin Heng going private, in light of the company’s latest share buyback mandate in October 2021. Sin Heng purchased 600,000 shares at an average price of S$0.394. The company currently holds 12.9 per cent of the maximum number of shares it is allowed to have.

“This is Sin Heng’s most aggressive buyback (to date), indicating that current price levels are still attractive and the outlook is positive,” said Ng.

Shares of Sin Heng : BKA 0% were trading at S$0.47, up 3.3 per cent or S$0.02, as at 11.03 am.