Pan-United Corporation

CIMB Research, Aug 19

PAN-UNITED Corp (PUC) intends to boost its revenue across the region by increasing its stake in Changshu Xinghua Port Co Ltd (CXP). This decision is probably the most important one that management has to make in recent times to lock in the company's longer-term prospects.

Its latest stake upsize in CXP has the potential to add 14-15 per cent to our FY2014-15 EPS, after accounting for interest costs from any debt taken. Our target price accordingly climbs to $1.08, still based on residual income.

Upgrade to "outperform" from "neutral", with catalysts expected from earnings contributions from very chunky MRT projects in the BBR segment and its improved earnings profile.

CXP is an integral part of PUC, being its second-largest source of earnings. CXP contributed 9 per cent to group revenue and 16 per cent to group Patmi (profit after tax and minority interests) in FY2012. Its operating momentum is expected to continue in the next few years.

We previously argued that PUC could raise shareholders' value by optimising its capital structure. Its latest stake acquisition is the first step towards that, we believe, and is the clearest manifestation of management's deviation from its usual conservative style.

Assuming that cash is upstreamed from Singapore Changshu Development Company (estimated at $10 million) which owns 95 per cent of CXP, the implied cost of its stake upsizing is $91 million.

We think PUC could fund this by borrowing $60 million and using $31 million from its cash hoard.

If PUC were to fund its entire acquisition with debt, its net gearing would only increase to 0.12-0.14 times in FY2013-2014. This should still be comfortable for management, we believe, with PUC's highest-ever gearing being 0.2 times in 2004.

This latest deal is meaningful and can add to earnings. Projected dividend yields of 4.6 per cent are not in danger. Apart from the consolidation of CXP's financials, other catalysts for the stock could include earnings contributions from very chunky MRT projects (Downtown lines 2 & 3 and the new Thomson line).

OUTPERFORM