PEC

Kim Eng on 20 Mar 2012

Background: PEC Ltd provides engineering, procurement and construction (EPC), as well as maintenance services to the process industries. Although revenue from the EPC services is lumpy, it forms the core of PEC’s operating revenue and is shored up by the more stable maintenance revenue.

Recent development: We attended the company’s briefing last week to find out more about its recent 2Q/1HFY Jun12 results. They were nothing to shout about, even disregarding the conservative provisioning for a delay in an overseas JV. More notably, the company is in a strong net cash position.

Results nothing to shout about. PEC’s 1HFY Jun12 results were encouraging from a revenue standpoint, marking a 10% increase from a year ago. However, cost pressures and a conservative provision of S$5.5m due to delays in a European JV project caused net profit to plunge by 71%.

Flat outlook with headwinds. Management guided a flat earnings outlook for FY Jun12. It said that about 70% of its S$270m orderbook as of 2QFY Jun12 will be recognised in FY Jun12. The company expects profit margins to remain squeezed by cost pressures and topline to be challenged by increasing competition. It aims to mitigate this by expanding its global footprint and seeking higher-margin adjacent industries such as the power sector.

Cash hoard to lead to stable dividend policy? PEC has a significant net cash balance, which has led management to hint at a possible dividend policy to be initiated to reward shareholders. Its historical dividend payout ratio of 20-25% is in line with peers and having a stable dividend policy will lend support to its share price.