Flattish 3Q Results, Stable Outlook
Intrinsic Value S$1.000
Prev Closing S$0.960
Pan – United Corporation Ltd (Pan United) released its 3Q FY13 results with 3Q revenue remaining flat at S$184.1m as compared to 2Q revenue of S$184.9m. PAT rose 5% YoY from S$14.0m to S$14.6m mainly due to a decrease in material costs and staff costs.
The lower than expected results and the increase in borrowings have led us to lower our profit estimates from S$51.1m to S$49.9m for FY13 onwards. We adjusted our WACC to 8.7% to reflect higher borrowing costs for Pan United, following their borrowing of S$62m for the purchase of Changshu Xinghua Port (CXP). Since our last update, Pan United has appreciated by 10.4% and with no catalysts for additional upside, we adjust our recommendation to Fairly Valued with an intrinsic value of S$1, implying a forward P/E of 10.8X compared to the current P/E of 13.0X.
Growth in ready-mix concrete (RMC) sales volume to be negated by higher labour costs: Demand for RMC in Singapore increased by 7.3% YoY from 9.4m m³ to 10.1m m³ due to higher construction activity. While we expect RMC sales volume to at least maintain at current levels, our forecasts of a 3% increase in labour costs would negate the upside from higher sales volume of RMC.
Higher gearing to fund CXP: The acquisition of Macquarie International Infrastructure Fund’s (MIIF) 34.2% stake in the CXP will allow Pan United to benefit from economic growth in China’s hinterland and high cargo flow along the Yangtze River. While we expect the port’s results to improve over the next few quarters, we believe that the profit for the next few years to go towards further port acquisition, or for reinvestment into the port facilities.
Back to normal for shipping: Although the Baltic Dry Index (BDI) has increased by 71% for 3Q FY13 (from 1,171 to 2,003) and fleet utilization rate rose to 89%, operating profits at the shipping division remain minimal. Currently, with the BDI returning to 1,543 and assuming utilization rate remains constant, we expect minimal contributions from the shipping division to Pan United’s bottom line profits.
Business Update: The Basic Building Resources (BBR) division continues to see demand from the construction sector. However, the increase in checks for dengue and other safety hazards has led to slower than expected project progress and hence, affected the demand for RMC from 2Q FY13 onwards. Furthermore, it is probable that the ‘Hungry Ghost Festival’ period will affect the level of construction activities in August.1 The depreciating Malaysian ringgit to Singapore dollars has also led to a fall in raw material prices, which has allowed Pan United to pass these cost savings to their customers
The BBR division continues to look into opportunities to expand in South East Asia. The company’s operations in Vietnam has reached breakeven point, however, contribution from the Vietnam unit is still inconsequential. Pan United has also recently embarked into Indonesia to explore the possibility of providing RMC for the Indonesian construction market.
The port and logistics division saw improved performance due to healthy cargo volume. Till 3Q FY13, we estimate the company to have handled a total of 6.6m tonnes of cargo. Compared to the same period for last year, we estimate that the total volume of cargoes handled has increased marginally by 0.3m tonnes from 6.3m tonnes of cargo. The increase was mainly brought on by higher volumes of logs, pulp and containers cargo (estimated 0.5m tonnes increase). However, this was offset by a decrease in steel cargo (estimated 0.2m tonnes).
Forecasts and Valuation: We have revised our forecasts slightly downwards after taking into account the growth prospects of the company in terms of its BBR division, and the ports and logistics division. Higher earnings from the port are likely to come in only from FY14 onwards. Growth from the overseas market for the BBR division are likely to be muted in the next few quarters as these are still in the start-up phases.
Nonetheless, the volume of building materials sold in Singapore should continue to increase in line with the high activity level in the construction sector. We expect demand for RMC to increase gradually for the Q4 FY13. While the company has taken on more borrowings to fund the acquisition of the port, we expect the company to maintain a similar dividend yield of 4% or S$0.04/share for shareholders. Since our last update, the company has appreciated by 10.4% and as there are no immediate growth catalysts, we are adjusting our recommendation to Fairly Valued with an intrinsic value of $1.
Publish date: 15/11/13