PEC Ltd - DBS Research 2017-03-06: Cash is king

PEC Ltd - DBS Vickers 2017-03-06: Cash is king PEC LTD. IX2.SI

PEC Ltd - Cash is king

  • A proven engineering, procurement and construction, as well as maintenance (EPCm) specialist for the growing downstream O&G in Middle East and Asia.
  • Turning around with the oil price rebound and uptick in O&G activities.
  • Sitting on cash hoard near market cap at 58 Scts/share, representing 68% of NTA.
  • Fair value of S$0.73 implies 18% upside potential.

The Business 

An established EPCm player in Singapore with strong overseas track record. 

  • Established since 1982, PEC Ltd (PEC) has more than 30 years of expertise in the provision of engineering, procurement and construction, as well as maintenance (EPCm) services. 
  • PEC services four main sectors, the oil and gas (O&G), petro-chemical, pharmaceutical and oil and chemical terminal industries, in Singapore, China, India, Indonesia, Malaysia, Myanmar, Thailand, Vietnam and Middle East, supported by its fabrication facilities in Singapore, Myanmar and Middle East.

A privatisation candidate? 

  • PEC is deemed an appealing privatisation candidate, sitting on a cash hoard of S$148m with minimal debt of S$13m as of end-December 2016, close to its current market cap. 
  • In addition, it is tightly held by the founder – Ko family, which collectively owns c.65% of PEC, based on our estimate. Though, we understand that the listing status is beneficial in corporate profiling when it comes to tendering for jobs in the global market.

The Stock 

Trading close to net cash level. 

  • PEC had a good run, from 42 Scts to the current 60-Sct level, post the report of a fabulous FY16 (FYE June) at end-August 2016. Despite this, valuation remains undemanding at 30% discount to book, close to net cash level of 58 Sct/share. 
  • Based on a blended 10x PE and 1x P/BV, we derive a fair value of S$0.73 for PEC.
  • Catalyst for re-rating could stem from the uptick in contract flow.

The tide is turning. 

  • PEC’s orderbook is running low at S$107m as of end Dec-2016 as it has not been securing major EPC contracts since May- 2015 due to oil crisis. We expect project volumes to start picking up in 1HFY18 (FYE June) alongside the oil price rebound, driving the earnings recovery of PEC from FY18.

Key Risks 

Lumpy project-based business; inherent execution risks. 

  • Contracts for project works are typically awarded on a project-based basis and are lumpy in nature. Contracts are usually priced as a mark-up over costs, hence unforeseen circumstances during execution may lead to cost overruns. 
  • PEC may perform additional works, other than those specified in the original contract specifications. It may face uncertainty over the recoverability of variation/alteration works.

Return *: 2
Risk: Moderate
Potential Target 12-mth* : S$ 0.73 (18% upside)

HO Pei Hwa DBS Vickers | Singapore Research Team DBS Vickers | 2017-03-06
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