Share Price S$0.865
Target Price S$1.25
Earnings hit by one-off provision
• Maintain BUY and target price of S$1.25.
• Pan United (PUC) remains one of our preferred picks in the construction sector due to its market leader position and established track record. We view PUC additional take up in Changshu Xinghua Port (CXP) positively as it is earnings accretive and is a better utilization of PUC’s cash in the bank.
• PUC reported 2QFY13 net profit of S$10.0m(-24%), dragged down by a one-time provision for doubtful debt of $2.2m (from one of the main contracts of LTA’s Downtown Line 2, Alphine Bau GmbH which filed for insolvency) in 2QFY13 and the omission of a vessel disposal gain of S$2.2m in 2QFY12. Excluding these one off items, PUC’s 2Q PBT will be 5.4% higher yoy, and 1HFY13 PBT will have increased 7.4% yoy, in line with our expectations.
• With the take up of additional interest in Changshu Xinghua Port (CXP) in the 3Q, we expect a rise in profits attributable to owners from the port division and an increase in interest expense in the 4Q, as the company takes on additional debt to fund the acquisition. Together with the one off provision for doubtful debt, we lower our FY13 net profit forecast attributable to equity holders of PUC by 5% to S$41.8m.
• Additional interest in CXP to be earnings accretive. PUC has purchased an additional 34.2% beneficial interest in CXP for S$101m. Based on CXP’s FY12 profit, the additional 34.2% interest will yield an additional annual profit of about S$5m which will translate to an investment yield of 5.0%, as compared to PUC’s financing costs of about 3%.
• A safe bet. As one of the top 10 ports in China, CXP has been enjoying a high utilization rate of 75-80% with a profitable record for the past 12 years. As such we view PUC’s additional take up interests in CXP to be positive, as it not only helps reduce PUC’s revenue reliance on its basic building material business, but also effectively utilize PUC’s excess cash in the bank. PUC’s current involvement in CXP also ensures that PUC is not taking excessive risk by going into a new business which it is not familiar in.
Publish date: 16/08/13