PanUnited - Stock Analyst Research

Target Price*SGD 0.46
RecommendationBUY
Market Cap*245mn
Publication Date14 Mar 2022

*At the time of publication

Pan-United Corporation – FY21 results above our expectations on construction recovery

  •  2H21 revenue and profit beat expectations, at 60.7% and 76.2% of FY21e estimates respectively. The beat was driven by higher sales from its concrete and cement business which recovered faster on the back of the faster pace of recovery in the construction sector.
  • Net gearing was 22% lower than our forecasts; FY21 DPS 0.6 cents higher than our expectations. Full-year 2021 dividend at 1.6 cents, represented a 60% payout, signalling confidence in the near- and mid- term outlook.
  • Manpower shortages, supply-chain disruptions and volatile freight costs continue to hamper growth recovery. We tweaked our GP margin expectations lower for FY22e/FY23e in anticipation of higher raw materials cost and supply-chain disruptions.
  • Maintain BUY with higher target price of S$0.46, from S$0.44. We raise FY22e earnings by 11% on account of the higher demand for ready-mixed concrete brought about by the construction recovery. Our TP is based on 16x FY22e P/E, a 15% discount to its 10-year historical average P/E on account of the still uncertain environment.

The Positives

+ 2H21 revenue and profit above, driven by recovery in concrete and cement segment; higher associate contributions. Group revenue increased 45% YoY in 2H21, growing at the same pace as 1H21 as the recovery of construction activities in Singapore continued to drive growth. According to the Building and Construction Authority (BCA), ready-mixed concrete (RMC) demand rose 52.7% in 2H21 and 59.4% for full-year 2021. RMC sales volumes rose, and is now at pre-COVID levels (Figure 2). Contributions from its associate, PT. Lanna Harita Indonesia in which it owns a 10% stake, also rose on the back of higher coal prices.

 

+ Net gearing 22% lower than our forecasts; FY21 DPS 0.6 cents higher than our expectations. Backed by net operating cashflows of S$33mn in 2H21, PanU repaid S$17.7mn in loans to lower its overall net gearing from 0.14x to a net cash position of $17mn. Interest expenses accordingly dropped by 38% YoY. It also declared a final DPS of 1.1 SG cents for FY21, bringing full-year 2021 dividend to 1.6 SG cents, representing a payout of 60%, above its dividend policy to distribute at least 30% of its annual PATMI. This, in our view, signals the Group’s confidence in its near- and mid- term outlook.

The Negative

– Manpower shortages, supply-chain disruptions and volatile freight costs. GP margin was slightly weaker YoY as raw materials price rose at a faster pace than average selling price. Dec-21 ASPs are 9% higher YoY at S$104/cu m and 7% higher vs. the same period in 2019. Given the strong demand for construction materials in the region, we do not think prices would moderate in the near-term. PanU also faced disruptions in raw-material supplies and had to search for alternatives. Supplies from new sources require lead times of a month for BCA testing before they can be imported. This hampered its ability to fulfil contracts. We tweaked our GP margin expectations lower for FY22e/FY23e in anticipation of higher raw materials cost from supply-chain disruptions.

 

Outlook

BCA upgrades forecasts of construction demand for 2022. The BCA has upgraded its forecasts of construction demand for 2022 to $27bn-32bn per year from the original $25bn-32bn per year, comparable with the preliminary $30bn in 2021. The BCA also projects that demand for building materials will increase in tandem with the increased construction demand. Steel rebar demand is forecasted to grow to 1mn-1.2mn tonnes in 2022, representing ~22% YoY increase.

 

We note that BCA’s forecasts for average construction demand in 2022-2025 excludes the development of Changi Airport Terminal 5 and expansion of the two integrated resorts. As our forecasts have not included these projects, there is upside if they go live.

 

In the near term, projects in the pipeline that will likely support the group’s growth are the Singapore Science Centre’s relocation, the Toa Payoh integrated development, Alexandra Hospital redevelopment, Bedok’s new integrated hospital, Phases 2-3 of the Cross Island MRT Line and the Downtown Line’s extension to Sungei Kadut.

 

With an approximately 40% market share in the industry, we continue to see PanU as a key beneficiary of the construction sector recovery. PanU’s batching plants still have capacity to take on a 10-15% increase in RMC demand in Singapore.

 

Maintain BUY with a higher TP of $0.46, from $0.44. We raise FY22e earnings by 11% on account of the higher demand for RMC brought about by the construction recovery. Our TP is raised to $0.46 from S$0.44 based on 16x FY22e P/E, a 15% discount to its 10-year historical P/E on account of the still uncertain environment. Stock catalysts are expected from higher contract volumes and better margins.

About the author

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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