Pan-United Corporation - Mixed outlook
- 4Q16 earnings in line; lower sales volumes compensated by cost control, better margins.
- 2.75 Scts final DPS declared.
- Outlook mixed as demand for Ready-Mixed Concrete (RMC) is expected to be lower despite higher construction demand.
- Maintain HOLD, SOTP-based TP at S$0.63.
Maintain HOLD, TP S$0.63.
- We maintain our HOLD recommendation on Pan United.
- Although the outlook for Singapore construction is expected to improve, demand for Ready-Mixed Concrete (RMC) is expected to be subdued as offsite construction processes such as pre-fabrication increase leading to moderating on-site building construction processes.
Selling prices are also on a downtrend albeit by a slower rate.
- With its port in China facing lower handling rates, and hence margin pressure, we do not expect earnings growth to be robust.
- The stock is trading at 15.7x FY17F PE, close to +1SD of its 10-year average mean PE. However, the stock supported by an attractive dividend yield of 5.6%. We hence continue to remain neutral on the stock.
Mixed construction outlook.
- According to the Building and Construction Authority (BCA), market demand for RMC is expected to be soft at 12-13.5m cubic metres (cbm) for 2017.
- On the back of relatively lower selling prices, we do not expect revenue growth to be robust for Pan-United.
- Yet, BCA is also forecasting that construction demand in 2017 will be stronger at S$28-35bn, from S$24bn in 2016.
Valuation: SOTP valuation methodology.
- Our TP of S$0.63 is derived from a sum-of-parts valuation of Pan-United.
- On a per share basis, we value its C&C (Concrete and Cement) business at 10x FY17F PE at S$0.18, CXP (Changshu Xinghua Port) port operations at S$0.49 based on 15x forward port earnings, CCIP (Changshu Changjiang International) port at S$0.14, net debt and others at -S$0.21 per share, and dividend at S$0.0375.
Key Risks to Our View
- Pan-United’s outlook is based on construction activities backed by civil projects in Singapore.
- Acceleration in private projects may cause a surge in construction demand, leading to better earnings outlook and upside to its share price.