Pan-United Corporation - DBS Research 2017-05-12: Neutral On Port Demerger Exercise

Pan-United Corporation - DBS Vickers 2017-05-12: Neutral On Port Demerger Exercise PAN-UNITED CORPORATION LTD P52.SI

Pan-United Corporation - Neutral On Port Demerger Exercise

  • Neutral on plans to demerge port business.
  • Interest savings offset by EPS dilution from rights issue.
  • Separate listing of port and Cement & Concrete businesses.
  • Maintain HOLD; S$0.63 TP.

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 likely to remain subdued as offsite construction processes such as pre-fabrication increase, leading to a moderation of on-site building construction processes. 

Selling prices are also on a downtrend. 

  • We are neutral on Pan-United’s plans to demerge its port business into a separate listing on HKSE as interest cost savings from paring down loans will be offset by share dilution from the imminent rights issue. 
  • The stock supported by an attractive dividend yield of 5.4%. We remain neutral on the stock.

Where we differ. 

  • We are less optimistic than consensus and are projecting an earnings decline on a relatively weaker operating outlook.

Potential catalyst. 

  • Pan-United’s share price direction is dependent on Singapore 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.


To demerge port business.  Rights issue on the cards. 

  • Pan-United has announced plans to demerge its port business (Xinghua) from its listco via a potential listing on HKSE. 
  • It is first proposing to do a 1-for-4 rights issue to raise up to S$60.9m at an issue price of S$0.43 per rights share to unwind external debt that Pan-United took on behalf of Xinghua when the latter acquired an additional stake in Singapore Chanshu Development (CCIP port) in 2013. 
  • There are also inter-company loans of S$102m owing by Xinghua to Pan-United, which will be capitalised into shareholdings in Xinghua as part of the demerger.

Port business to be distributed in specie to shareholders and listed on HKSE. 

  • In conjunction and subject to the HKSE listing for the port business, shareholders in Pan-United will enjoy capital reduction and distribution in specie of 1 Xinghua share for every 2 Pan-United shares held. 
  • Xinghua will also issue up to 5% of the enlarged share capital to selected employees and business partners. Xinghua will enter into a share swap to acquire the remaining 10% it does not own in Singapore Chanshu Development with Petroships Investment Pte Ltd.
  • The demerger will take place after the completion of the rights issue and the rights issue is not conditional upon the demerger.

1Q17 results disappoint on weak fundamentals. 

  • In 1Q17 results, revenue and EBIT declined by 15% and 11% y-o-y led by softer selling prices, lower cargo handling volume and higher operating expenses. This was below our expectations.

Our View

A decoupling exercise, not a spinoff or asset sale. 

  • The port business will be decoupled from the SGX-listed entity and independently listed on the HKSE. Pan-United will then become a pure cement and concrete business player.

Shareholders will own separate shares in Xinghua and PanUnited.

  • Xinghua shares will be listed on the HKSE by way of introduction. It is not an asset sale or spin-off as there is no potential buyer or a selling price premium attached to the port. The port’s initial shareholders are Pan-United’s existing shareholders who will be awarded one Xinghua share for every two Pan-United shares held. 
  • The 1-for-4 rights issue will potentially see 25% dilution of up to 141.6m new ordinary shares in Pan-United.
  • Post demerger, the current listed entity Pan-United will reflect only the Cement & Concrete business as the port’s contribution will be hived off as a separate listed entity. Both book value and earnings will decline post demerger exercise. 

Neutral; downside pressure from dilution and weak results offset by lower interest costs.  

  • Pan-United’s next milestone will be to execute the rights issue and unwind the debt it is carrying on behalf on Xinghua. Thereafter, it will seek the distribution in specie along with the HKSE listing of Xinghua. We are neutral on this development. 
  • There will be interest savings as loans are repaid. However, the rights issue will see potential share dilution of approximately 25%. 

Port provides earnings stability, while Cement and Concrete business provides cashflow and yield. 

  • As far as Pan-United is concerned, most of the cashflows supporting current dividend payout is derived from the Cement and Concrete business. Therefore, we expect Pan-United’s yield to largely sustain post demerger. However, we note that the port business is more stable when compared to the cyclicality of the Cement and Concrete business in recent years. 
  • In fact, Pan-United’s earnings were supported by the port’s stable contribution over the past two years when both pricing and demand for Cement and Concrete turned soft. 
  • Pan-United’s share price has historically been driven by the outlook for Singapore construction.


Maintain HOLD, TP S$0.63.

  • We value Pan-United on a SOTP basis and hence, already have a valuation on the port. We therefore we do not expect significant gains for shareholders (arising from the port’s listing) unless the asset trades on the HKSE at above our current valuation. 
  • We have trimmed our earnings by 6% in view of weaker than expected 1Q17 earnings. 
  • On a per share basis, we value its C&C (Concrete and Cement) business at 10x FY17F PE at S$0.15, CXP (Changshu Xinghua Port) port operations at S$0.45 based on 15x forward port earnings, CCIP (Changshu Changjiang International) port at S$0.14, net debt and others at -S$0.14 per share, and dividend at S$0.04.

Key Risks to Our View

  • 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.

Alfie Yeo DBS Vickers | http://www.dbsvickers.com/ 2017-05-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.630 Same 0.630