PAN UNITED

UOBKayhian on 27 Feb 2014

VALUATION

• Maintain BUY but with a lower target price of S$1.09 as we roll forward our SOTP valuation to 2015.

FINANCIAL RESULTS

• 4Q13 net profit grew 37% yoy to S$12.0m due mainly to increased contribution from Changshu Xinghua Port (CXP) as Pan United (PUC) increased its stake in the port from 51.3% to 85.5% during the year. Excluding one-off items (provision for doubtful debt of S$2.2m and vessel disposal gains of S$2.2m in 2012), pre-tax profit for FY13 would have grown 5.3% yoy to S$66.6m.
• Gearing to rise. PUC moved from net cash position (-3.4% net debt/asset) in 2012 to 8.5% net gearing in 2013 with the drawdown of bank loans for the acquisition of the additional stake in CXP. Gearing ratio is expected to increase further as the acquisition of Changshu Changjiang International Port (CCIP) for Rmb436.5m (S$91.3m) is expected to be partially financed by debt at the CXP level, and with PUC consolidating CCIP’s debt into its balance sheet.

Investment Highlights

• Outlook. With the BCA projecting construction output to remain strong (S$34b-36b) in 2014, management expects its Basic Building Resources (BBR) segment to remain steady in 2014. PUC is also looking to scale up its port business after increasing its stake in CXP and with the recent acquisition of CCIP. While CCIP recorded a loss of about S$5.1m for 9M13, management plans to cut CCIP’s losses by at least half in 2014, with port operations expected to remain profitable in 2014.
• As the acquisition of CCIP will be partially financed by debt (estimate S$46m) and with the consolidation of CCIP’s debt (estimate S$60m) into its balance sheet, we expect PUC’s gearing to increase from its current net gearing of 8.5% to about 27%.
• Despite a constructive outlook expected for the BBR segment and continued growth in CXP, we expect the positive impact to be negated by rising interest expense and slight losses from CCIP. As such, we lower our 2014 and 2015 net profit forecasts by 12% and 11% to S$48.4m and S$54.9m respectively.
• Our View. PUC is likely to see a flat performance in 2014 with growth resuming from 2015 onwards. Positive dynamics from the local construction sector leading up to the Singapore’s election in 2016 coupled with decreasing financial costs as PUC pare down its loans are likely to boost future earnings. With a dividend yield of 4.6%, we believe PUC still offers value to investors who have a longer investment horizon and is willing to stand by PUC through 2014.

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

Pan United Corporation

UOBKayhian on 31 Oct 2012

Valuation

·          Based on Bloomberg’s consensus estimate (two brokers), Pan United Corporation (PUC) has a 12-month target price of S$0.75 with a forecast net profit of S$36.1m for 2012. The stock is trading at 10.5x 2012F PE with a dividend yield of 5.2%.

·          PUC has a share buyback mandate and had accumulated more than 8.0m shares from the open market.

Investment Highlights

·          PUC has three key businesses, namely Basic Building Resources (BBR), Port and Logistics, and Shipping (tugboats and barges). BBR makes up about 74% of total EBITDA with the rest coming from Port and Logistics. Shipping is barely breaking even at the EBITDA level.

·          PUC is the largest cement supplier and producer of ready-mixed concrete in Singapore with a 33% market share. Concrete is produced by mixing sand, cement, granite, water and other chemicals. Gross margins are about 20% but as PUC owns several granite quarries in Malaysia and Indonesia, it is able to improve margins by 1-2ppt. PUC currently can mine 3.0m tonnes of granite annually. 

·          PUC owns 10 pairs of tugboats and barges, a reduction from 14 pairs previously. The barges carry cargoes such as gymsum, coal, aggregates and sand within Southeast Asia. However, the segment made a loss of S$5.0m in 2011 due to depressed freight rates from an oversupply of barges, competitive bulk carrier rates and a repercussion of Indonesia’s cabotage shipping law. The company targets to break even in this year.

·          PUC has a 51.3% stake in Changshu Xinghua Port, located on the southern bank of the Yangtze River. It has 1 sq km of land area and 1.7 km of waterfront with 8 berths. Facilities include 12 cranes, 14 warehouses and more than 600,000sqm of yard storage space. 

Our View

·          PUC is one of the beneficiaries of the construction boom in Singapore. Construction demand in 2012-15 is projected at S$19b-27b annually, according to the Building and Construction Authority. We think this is likely to increase following the announcement of the Thomson Line MRT project and the increase in public housing construction inSingapore. Management revealed that within a MRT tender package of S$200m-300m, 8-10% of the cost would be for concrete. PUC had supplied 85% of the Downtown Line concrete requirement. 

·          Net profit jumped 52.0% yoy to S$22.7m in 1H12, driven by the BBR division and a one-off disposal gain of S$2.2m from the sale of three pairs of tugboats and barges. The BBR division had achieved higher sales volume arising from increased demand.