PEC Ltd reported another quarter of lackluster result with 2Q13 PATMI falling 15% YoY to S$2.6m despite revenue increasing by 11% to S$144m. Gross margin declined to 14% (2Q12: 20%) due to competitive pricing and cost pressures in both the project work and maintenance sectors. Other operating expenses also jumped 55% YoY to S$12.4m from cost increases associated with higher headcount (i.e. accommodation, transport expenses, etc). Besides the tight labour market, PEC’s earnings growth is also limited by slower pace of petrochemical investments due to a change in EDB’s energy policy. Meanwhile, we note that its share price has risen by almost 11% since our last report. We now see limited upside ahead and think that its earnings are likely to remain sluggish. Therefore, we CEASE COVERAGE on the stock due to the lack of medium-term price drivers and muted earnings outlook.
Lackluster results
PEC Ltd reported another quarter of lackluster result with 2Q13 PATMI falling 15% YoY to S$2.6m despite revenue increasing by 11% to S$144m. Gross margin declined to 14% (2Q12: 20%) due to competitive pricing and cost pressures in both the project work and maintenance sectors. Other operating expenses also jumped 55% YoY to S$12.4m from cost increases associated with higher headcount (i.e. accommodation, transport expenses, etc).
More time needed to collect back cash…
Although PEC still possesses a strong balance sheet with almost S$97m in net cash, an increasing portion of its capital are now tied to contracts-in-progress (net of progress billings), trade and other receivables. To illustrate, contracts-in-progress and receivables have now expanded by 64% YoY to S$147m (as of end Dec 2012), while revenue increased by just 11% YoY. Although PEC’s billing and collection were based on agreed milestone completion, the increase in cash collection cycle (days) could also mean higher credit risk from clients.
Unrelenting headwinds
As mentioned in our last report (“1Q13 impacted by higher manpower costs”, 15/11/2012), PEC continues to face severe challenges from the tight labour market. 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. Therefore, manpower costs are likely to remain elevated over the near term. In addition, PEC’s earnings growth is limited by a slower pace of petrochemical investments. In Jun last year, Singapore’s Economic Development Board (EDB) – the lead agency responsible for attracting energy investments – said that it has no plans to attract any more greenfield refinery investments.
Ceasing coverage
Meanwhile, we note that the PEC’s share price has risen by almost 11% since our last report. We now see limited upside ahead and think that its earnings growth is likely to remain sluggish. Therefore, we CEASE COVERAGE on the stock due to the lack of medium-term price drivers and muted earnings outlook.
PEC Ltd reported another quarter of lackluster result with 2Q13 PATMI falling 15% YoY to S$2.6m despite revenue increasing by 11% to S$144m. Gross margin declined to 14% (2Q12: 20%) due to competitive pricing and cost pressures in both the project work and maintenance sectors. Other operating expenses also jumped 55% YoY to S$12.4m from cost increases associated with higher headcount (i.e. accommodation, transport expenses, etc).
More time needed to collect back cash…
Although PEC still possesses a strong balance sheet with almost S$97m in net cash, an increasing portion of its capital are now tied to contracts-in-progress (net of progress billings), trade and other receivables. To illustrate, contracts-in-progress and receivables have now expanded by 64% YoY to S$147m (as of end Dec 2012), while revenue increased by just 11% YoY. Although PEC’s billing and collection were based on agreed milestone completion, the increase in cash collection cycle (days) could also mean higher credit risk from clients.
Unrelenting headwinds
As mentioned in our last report (“1Q13 impacted by higher manpower costs”, 15/11/2012), PEC continues to face severe challenges from the tight labour market. 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. Therefore, manpower costs are likely to remain elevated over the near term. In addition, PEC’s earnings growth is limited by a slower pace of petrochemical investments. In Jun last year, Singapore’s Economic Development Board (EDB) – the lead agency responsible for attracting energy investments – said that it has no plans to attract any more greenfield refinery investments.
Ceasing coverage
Meanwhile, we note that the PEC’s share price has risen by almost 11% since our last report. We now see limited upside ahead and think that its earnings growth is likely to remain sluggish. Therefore, we CEASE COVERAGE on the stock due to the lack of medium-term price drivers and muted earnings outlook.
No comments:
Post a Comment