Raising its stake in CXP, a major port operator in eastern China, was probably PUC’s best decision in recent times to lock in its longer-run prospects. We expect strong performances going forward, anchored by its core basic building resources (BBR) segment.
Our residual-income-derived target price climbs as we incorporate its higher stake in CXP. Under our revised rating structure, our rating has been changed from Outperform to Add. Catalysts could come from earnings contributions from very chunky MRT projects in the BBR segment and an improved earnings profile led by CXP.
CXP to add weight
PUC has raised shareholders‟ value by optimising its capital structure through its recent acquisition of more shares in CXP. CXP is an integral part of PUC, being its second-largest source of earnings. CXP contributed 9% to group revenue and 16% to group PATMI in FY12. Its growth momentum is expected to continue in the next few years, potentially adding 14-15% to PUC‟s earnings over the next two years after accounting for interest costs from any debt taken.
Dividend payout intact
Details of funding for its additional CXP stake are not out yet but we are unfazed. Even if PUC were to fund its acquisition with debt, its net gearing would only increase to 0.12x in 2014, in our estimation. This should still be comfortable, against PUC‟s highest-ever gearing of 0.2x in 2004. We are also confident that dividend payouts are not at risk. In fact, taking into account its future capital requirements and cash-flow generation, we think there is scope for PUC to raise its dividend payments to 4 Scts/share going forward.
Bread-and-butter business still great
Apart from the consolidation of CXP, other catalysts for the stock could come from earnings contributions from chunky MRT projects (Downtown Lines 2 & 3 and a new Thomson line). PUC‟s bread-and-butter BBR division is expected to maintain its volume sales of ready-mix concrete.
Publish date: 29/11/13