DBS Vickers 2015-08-14: Pan-United Corporation - 2Q15; Lower margins a drag. Maintain HOLD.


Lower margins a drag 

  • 2Q15 below expectations on weak BBM margins. 
  • Robust long term construction outlook but lower BBM margins stifles growth. 
  • Cut FY15-16F earnings by 14-19%. 
  • Share price supported by 5.9% yield, maintain HOLD with lower S$0.68 TP

Below expectations led by weak RMC margins. 

  • Revenue was in line at S$208m (+10% y-o-y), driven by BBM segment, while earnings of S$6.8m (-36%) was below expectations. Competition led to lower ASPs and margins. This is despite Pan-United gaining market share in the RMC market (to 26-27%) in 2Q15. Market RMC volumes were 12% higher, but a decline in selling prices due to lower input costs and competition led to lower margins. Port and shipping operations remained stable with utilisation at 85% and 80% respectively. An interim DPS of 1.5 Scts was declared, in line with our expectations. 

Margins a concern. 

  • Singapore’s construction pipeline remains firm. After 2H14’s decline in Singapore’s construction GDP, activity picked up again in 1H15 supported by public sector projects including ongoing rail projects. Long term pipeline includes new rail lines, North South Expressway, Terminal 5, Tuas mega port, and Pasir Panjang Terminal Phases 3 and 4. However, BBM margins are a concern for now as it is hampering earnings recovery. 

Cut FY15-16F earnings by 14-19%. 

  • 1H15 accounted for only 32% of our initial FY15F earnings estimate. We have hence factored in weak 2Q15 earnings into our forecast. 
  • We raise FY25 revenue to S$835m on higher RMC demand from existing projects such as DTL and Thomson Line going forward. However, we lower our margin projection in FY15F to reflect the drag in 2Q15’s RMC margins. This is slightly mitigated higher contribution from port operations. 

Maintain HOLD, TP lowered to S$0.68. 

  • We lower our SOTP based TP to S$0.68 post earnings revision. 
  • We believe that downside for the stock is protected by 6% yield, but upside for the stock will be limited due to margin drag from the RMC business and higher interest costs from debt. Even though construction activity will be robust going forward, we look for improvement in RMC margins to improve before we turn positive on the stock.

Alfie YEO | http://www.dbsvickers.com/ DBS Securities 2015-08-14
HOLD Maintain HOLD 0.68 Down 0.85