Pan-United Corporation - DBS Research 2017-08-14: Weak Outlook

PAN-UNITED CORPORATION LTD P52.SI

Pan-United Corporation - Weak Outlook

We downgrade our recommendation on Pan-United to FULLY VALUED.
We see downside to the stock due to the following:
1. Even though the outlook for Singapore construction is expected to improve, demand for Ready-Mixed Concrete (RMC) is likely to remain subdued as off-site construction processes such as pre- fabrication are expected to increase, leading to a moderation of on-site building construction processes. Selling prices are also on a downtrend.
2. Interim dividend cut for FY17 potentially signals risks of future DPS reduction and lower dividend yield. Dividend yield is now 5% and below.
3. Following a 1-for-4 rights issue in July, its share base has now increased to 700m shares with 25% dilution and no significant increase in earnings projection. We have turned negative on the stock for these reasons.

We see the stock drifting into negative territory as macro outlook for construction is expected to weigh on earnings.
Furthermore, there is intention to spin off the port business from the listco, overweighing the stock into a pure play Cement & Concrete business. Dividend cut has presented further disappointment to dividend yield.

Pan-United’s share price direction is dependent on Singapore's construction GDP growth. According to the Building and Construction Authority (BCA), while it is projecting a stronger construction demand in 2017 at S$28- 35bn (from S$24bn in 2016), 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. A stronger-than- expected pick-up in demand could be a potential catalyst for the counter.

Our TP of S$0.51 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 FY18F PE at S$0.09, CXP (Changshu Xinghua Port) port operations at S$0.35 based on 15x forward port earnings, CCIP (Changshu Changjiang International) port at S$0.11, net debt and others at -S$0.04 per share.

Pan-United’s outlook is based on construction activities from 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.

Pan-United reported a set of results which disappointed our expectations. Core earnings were S$5.4m (+3.2% y-o-y) on the back of lower revenue (S$165m, -7.6% y-o-y) and operating margins (5.7%, -1ppt). Interim dividend declared was 0.5 Sct, below our expectation of 1 Sct. We note that cash has declined by c.S$24m in 1H17 while net debt has increased by c.S$11m to S$236m.

Revenue drop of 7.6% y-o-y was affected by softer demand and lower selling prices of ready-mixed concrete (RMC) and cement division.
According to the Building and Construction Authority (BCA), industry demand for RMC and cement declined 13% and 20% y-o-y between January and May 2017. The average selling prices of RMC and cement also fell by 8% and 11% y-o-y respectively in 1H17. The ports division remained stable supported by cargo volumes.

Core margins also disappointed. While gross and operating margins improved sequentially, they were comparatively lower y-o-y at 13.3% (-0.5ppt) and 5.7% (- 1ppt). Although COGS and opex have shown a y-o-y decline, the more significant decline in revenue resulted in inability to defray fixed costs and led to lower margins.

Outlook continues to be weighed down by soft construction market. Singapore’s construction GDP has suffered a y-o-y decline for four consecutive quarters from 3Q16 to 2Q17.
In view of a soft outlook, we have reduced our revenue projection as well as imputed a lower margin structure to reflect both weak 2Q17 performance and a lower margin run-rate. These resulted in an earnings reduction of 14% and 10% for FY17F and FY18F respectively.

We lower our SOTP-based TP to S$0.51 on the back of earnings cut. We also downgrade the stock to FULLY VALUED over three key reasons.
1. macro outlook is weak for Singapore construction GDP and more so in the Cement & Concrete segment;
2. interim dividend has been cut, lowering dividend yield for the stock, with a potential risk of DPS cut going forward;
3. 1-for-4 rights issue has diluted EPS for the stock, with no significant improvement to earnings forecast.
In addition, the intention to spin off the port business would expose the stock to the Singapore construction industry further.
Our TP of S$0.51 is derived from the following: The C&C (Concrete and Cement) business based on 10x FY18F PE is now at S$0.09, with the port valued at S$0.46, and net debt and others at -S$0.04 per share.

Alfie Yeo DBS Vickers | http://www.dbsvickers.com/ 2017-08-14

DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 0.51 Down 0.630