STI : 3,086.64
(Downgrade from BUY)
Price Target : 12-Month S$ 1.03 (Prev S$ 1.21)
Acquires CCIP port in Changshu
•Paid RMB437m at 1.3x book for 90% stake in Changshu Changjiang International Port (CCIP); funded by 50% debt, 50% internal cash
•Plans to expand CXP’s port operations through CCIP’s additional capacity
•Net debt increased to 0.5x, earnings reduced by 8% on higher interest cost
•Downgrade to HOLD with lower S$1.03 TP
Buys 90% stake in Changshu Changjiang International Port. Pan-United (PAN) announced on Wednesday that it has acquired a 90% stake in Changshu Changjiang International Port Co., Ltd. (CCIP) for RMB436.5m (S$91.3m at 1.3x book) from Changshu Binjiang Urban Construction Investment & Management Co., Ltd (CBUC). The multi-purpose break bulk port facility is located adjacent to Pan-United's CXP port. The acquisition will be funded by 50% debt and 50% internal resources.
Strategic acquisition positive for long term growth PAN intends to integrate the operations of both ports, and to ultimately diversify their cargo bases and expand cargo volumes. Having freed up deep water berths for larger vessels, CXP can now concentrate on increasing volumes from international cargo. In addition, increased yard and warehousing space will support volume expansion.
Higher interest cost, lower earnings. However, the port is new, operating at low utilization rate of 34%. It needs to ramp up utilization to >50% to breakeven, which could take more than a year. Meanwhile, higher interest burden will dampen earnings from PAN’s port operations, and net gearing will increase to 0.5x. The additional debt will include: 1) CCIP’s acquisition financing; and 2) CCIP’s own debt. The higher interest cost will translate into an 8% earnings reduction for PAN to S$52m for FY14F.
Downgrade to HOLD, with lower TP of S$1.03. After accounting for higher debt and lower earnings, our SOTP valuation of PAN is at S$1.03 per share. Downgrade to HOLD
Publish date: 21/02/14