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.