Below expectations. 3Q09 net profit of S$3.0m (-86% yoy) was far below market and our expectations, with 9M09 net profit of S$54.3m constituting only 65% of our FY09 forecast (S$83.5m) and 63% of consensus (S$86.4m). The negative surprise was a larger-than-expected S$23.4m charge for realised and unrealised forex translation losses on ¥ strength and a weak S$ and A$. 3Q09 revenue fell 7.5% yoy to S$146m, mainly on a 33% yoy drop in revenue from equipment sales. Gross margin was higher qoq at 37.9% from 36.8% in 2Q09, and from 38.8% a year ago.

Forex impact. If not for the strong ¥, TAT would have posted a net profit of S$26.4m (+51% yoy) for 3Q09, and S$74.2m for 9M09 (+33% yoy). The realised loss of S$6.8m was related to inventory, while the S$16.6m unrealised loss was related to trade payables. The unrealised loss may be reversed in the future, depending on when payables are settled and the prevailing forex rate.

Cautiously optimistic outlook. Recent announcements by global governments to pump-prime their economies via infrastructure spending are expected to boost the demand for construction services and equipment. For equipment sales, TAT has already cancelled 50% of its outstanding orders to suppliers. There remains another 20 units for delivery over the next nine months. Management guided that inventories will be pared down in the coming quarters by 15% from S$219m. This may be through outright sales, or transfers and reclassifications as rental assets. On rental rates, management expects a 5-10% fall in FY10 while crane rental fleet utilisation is expected to stay at around 70%. The policy of a minimum 40% dividend payout remains unchanged.

Downgrade to Neutral from Outperform. We cut our FY09-11 forecasts by 19- 27% to reflect weaker rental rates and a vastly weaker outlook for equipment sales. With our earnings reductions, our target price drops to S$0.69 from S$0.90, based on an unchanged CY09 P/BV of 0.8x. This in line with its current book value of S$0.72. Current valuations appear to have priced in TAT’s challenges with no near-term positive catalysts.