Strategic investor pumps in S$65m. Tat Hong Holdings Ltd (Tat Hong) has entered into an agreement with a strategic investor, AIF Capital, to raise net proceeds of S$63.5m (gross proceeds: S$65m). Under the terms of the agreement, which is still pending regulatory approvals, Tat Hong will issue 65m convertible redeemable preference shares (CRPS) at an issue price of S$1.00 each. Each CRPS is convertible into one ordinary share, potentially enlarging the group's issued share capital by 12.8%. CRPS holders will only be entitled to ordinary dividends till 2014. Thereafter, holders will be entitled to preference dividends of 25 S cents/yr in the event that the CRPS are not converted and if Tat Hong does not exercise its right of redemption, which is unlikely, in our view.

M&A in the works? 80% of the net proceeds, or approximately S$50.8m, will be used to fund the group's expansion plans in Australia and China, while the remainder will be used for working capital purposes. Tat Hong had previously articulated its plans to grow inorganically. This latest fund-raising exercise will boost its financial muscle, bringing it another step closer to its M&A ambitions. Any acquisitions are likely to be within its core business activities of crane or general equipment rental. Management expects its acquisition targets to be earnings accretive.

Boosts financial position and cross-border expertise. AIF Capital's investment will not only strengthen Tat Hong's balance sheet health, it could also boost the group's long term growth prospects by introducing new growth opportunities which were previously unavailable. We estimate that Tat Hong's FY10 gearing could drop from 36.7% to just 20.0% with the additional capital. AIF will be given a non-executive representation on Tat Hong's Board, reaffirming its long term commitment to Tat Hong. With its deep insight into Asian markets, we believe that AIF Capital can contribute positively to Tat Hong's future expansion plans.

Maintain HOLD ahead of 1Q10 results. We are keeping our earnings estimates intact pending the release of the group's 1Q10 results on 14 Aug 2009. Our fair value estimate, however, has been raised to S$1.15 from S$0.99 to reflect the increase in NTA arising from the fund-raising exercise. While the group's long term growth prospects have been given an additional boost, near term concerns regarding weak equipment sales and rental rate compression may continue to weigh on near term earnings. As such, we maintain our HOLD rating on the stock.