PEC Ltd

OCBC on 27 Aug 2012

PEC Ltd (PEC) reported an improved set of 4QFY12 results, with net profit jumping by 30% YoY to S$4.6m, mainly due to increased contribution from the maintenance services in Singapore and project works in Middle East and Malaysia. In the quarter, it also had a net write-off of S$6.2m on its problematic Rotterdam project. With this closure, we believe management could focus its energies on growing its business, especially in the Middle East and the Southeast Asia regions. Its order-book remains healthy at S$258m, but margins may remain depressed over the near term. Maintain HOLD with unchanged S$0.64 fair value estimate.

4QFY12 results above our expectations
PEC Ltd (PEC) reported an improved set of 4QFY12 results, with net profit jumping by 30% YoY to S$4.6m, such that FY12 net profit came in at S$11.4m and ahead of ours and the street’s expectations. The improvement in 4Q was mainly due to increased contribution from the maintenance services in Singapore and project works in Middle East and Malaysia. Nonetheless, FY12 net profit was still down 64% YoY, due to (i) stiffer pricing competition and cost pressures, which resulted in lower gross margin of 19% (FY11: 30%), and (ii) write-offs on its Rotterdam project. Separately, the group also announced 2.5 S cents final dividend.

Rotterdam issues finally over
During the quarter, PEC wrote back S$11.1m of losses related to its JV, Verwater-Audex B.V., on the extinguishment of the group’s financial obligations to the latter. In conjunction, it also made an allowance of S$17.3m for debt against Verwater-Audex B.V. After adjusting for provision made in FY11 and currency fluctuations, the net impact of the write-off was S$12.1m in FY12. With this, we believe the group has finally reached a closure on the Rotterdam project and we do not expect further write-offs.

Sharp increase in contracts-in-progress
Meanwhile, PEC’s contracts-in-progress jumped by 164% QoQ to S$62.1m. Management explained that it did more work in the latest quarter (revenue for 3Q12: S$106.7m; 4Q12: S$140.7m) and progress billing was based on agreed milestone completion. However, this could also imply a longer billing cycle, and possibly higher credit risk from its clients.

Maintain HOLD with unchanged S$0.64 fair value estimate
With the conclusion of the Rotterdam JV, we believe management could focus its energies on growing its business, especially in the Middle East and the Southeast Asia regions. Its order-book remains healthy at S$258m, but margins may remain depressed over the near term. Maintain HOLD with unchanged S$0.64 fair value estimate.