PEC Ltd’s revenue and net profit to shareholders increased by 9% and 32% YoY to S$120m and S$3.3m respectively for 1Q12, but the results were still below our estimates due to higher-than-expected administrative and other operating expenses. We understand that a large portion of the increased expenses was related to higher headcount and salary increases. Over the medium- to longer-term horizon, we believe that the industry may consolidate and a margin reversion is likely. Current valuation for PEC is undemanding with net cash (S$117m as of end-1Q13) representing more than 70% of current market capitalization. Nonetheless, we cut our valuation peg to 0.9x (previously 1x) on the concerns of a tighter foreign labour supply. Maintain BUY with lower fair value estimate of S$0.76 (previously S$0.86)
1Q net profit S$3.4m
PEC Ltd’s revenue and net profit to shareholders increased by 9% and 32% YoY to S$120m and S$3.3m respectively for 1Q12. However, the results were still below our estimates due to higher-than-expected administrative (S$8m, +17% YoY) and other operating expenses (S$13.8m, +58% YoY). We understand that a large portion of the increased expenses was related to higher headcount and salary increases.
Tight labour market
Among others, the management said that it faces strong challenges from the tight labour market. PEC is highly dependent on foreign labour, which represents more than 50% of its workforce. As the Singapore government tightens the foreign labour supply, the group would have to grapple with fewer foreign workers and find ways to raise its productivity. In the near term horizon, this would mean higher manpower costs. Over the medium- to longer-term horizon, we are less negative and believe that a margin reversion is likely to happen. This industry is already struggling with extremely low margins that are unsustainable. With the current squeeze in the foreign labour supply, the industry may finally see some consolidation with weaker players being weeded out. The larger and stronger players like PEC should survive and do well. Indeed, the oil refineries in Jurong Island will always need subcontractors to service their plants. It is also in their best interests to see that its subcontractors are earning healthy level of margins.
Undemanding valuations
Current valuation for PEC is undemanding with net cash (S$117m as of end-1Q13) representing more than 70% of current market capitalization. Nonetheless, we cut our valuation peg to 0.9x (previously 1x) FY13 NAV on concerns of a tighter foreign labour supply. Maintain BUY with lower fair value estimate of S$0.76 (previously S$0.86).
PEC Ltd’s revenue and net profit to shareholders increased by 9% and 32% YoY to S$120m and S$3.3m respectively for 1Q12. However, the results were still below our estimates due to higher-than-expected administrative (S$8m, +17% YoY) and other operating expenses (S$13.8m, +58% YoY). We understand that a large portion of the increased expenses was related to higher headcount and salary increases.
Tight labour market
Among others, the management said that it faces strong challenges from the tight labour market. PEC is highly dependent on foreign labour, which represents more than 50% of its workforce. As the Singapore government tightens the foreign labour supply, the group would have to grapple with fewer foreign workers and find ways to raise its productivity. In the near term horizon, this would mean higher manpower costs. Over the medium- to longer-term horizon, we are less negative and believe that a margin reversion is likely to happen. This industry is already struggling with extremely low margins that are unsustainable. With the current squeeze in the foreign labour supply, the industry may finally see some consolidation with weaker players being weeded out. The larger and stronger players like PEC should survive and do well. Indeed, the oil refineries in Jurong Island will always need subcontractors to service their plants. It is also in their best interests to see that its subcontractors are earning healthy level of margins.
Undemanding valuations
Current valuation for PEC is undemanding with net cash (S$117m as of end-1Q13) representing more than 70% of current market capitalization. Nonetheless, we cut our valuation peg to 0.9x (previously 1x) FY13 NAV on concerns of a tighter foreign labour supply. Maintain BUY with lower fair value estimate of S$0.76 (previously S$0.86).
No comments:
Post a Comment