Background – Largest supplier of ready mixed concrete and cement in Singapore
Pan-United is the largest supplier of ready mixed concrete (RMC) and cement in Singapore, with market shares of about 35% and 28% respectively in 2014. The basic building resources business accounted for 80.2% of the group’s revenue in 2014, with the port and shipping divisions making up for 10.6% and 9.2% of revenue. The port division refers to the ownership and operation of Xinghua Port Group, of which Changshu Xinghua Port is one of the top 10 river ports in China. With annual handling capacity of 18.0m tonnes, the port is currently about 95% utilized for the Changshu Xinghua Port section and 56% utilized for the Changshu Changjiang International Port section. Both sections are located side by side. The shipping division refers to a fleet of tugboats and barges which ply the region shipping coal, gypsum, sand and aggregates.
FY15 results substantially priced in
Pan-United’s share price has declined by 27.4% year-to-date in 2015, from S$0.84 on 31 December 2014 to S$0.61 as of 13 November 2015. On a trailing 12-month basis, earnings per share has likewise declined by 25.5% from the 5.1 cents per share of FY14.
Pan-United’s net profit attributable to shareholders fell by 29% year-on-year to S$6.0m in 3Q15, in spite of revenue growing by 7% to S$209.4m, mainly due to lower selling prices for building resources and higher imported raw material costs. Year on year, net margin fell from 4.3% to 2.9% in 3Q15. The increase in raw materials cost was driven partially by the depreciation of the SGD against the USD, by about 10% year-on-year during 3Q15.
Share Price versus Quarterly EPS
Source: Company, NRA Capital
Improved near term outlook
Based on recent trends, we noticed that the year-on-year declines in selling prices and the SGDUSD rate have slowed. In addition, raw material, subcontract and other direct costs have remained stable at 79.3% of revenue in 3Q15, against 79.2% in 2Q15, in spite of quarter-on-quarter depreciation in selling prices and the SGDUSD rate. Hence, the improved raw material margin suggests that Pan-United has also been implementing cost cutting measures to improve profitability.
Selling prices seen stabilizing. According to prices published by the Building and Construction Authority, average monthly Ordinary Portland Cement price and Grade 40 pump RMC price fell by 5.5% and 9.9% year-on-year during 3Q. However, prices fell by only 1.3% and 2.2% respectively when compared to 2Q15. Moreover, the decline happened largely over June and July 2015, with prices of both products remaining stable or constant during July, August and September 2015.
For 2016, we do not foresee that the company will further increase market share at the expense of margins. Price competition seems to be stabilizing and several smaller competitors have merged in recent years, pointing to a less crowded market and more stable prices.
Selling Prices of Cement and RMC
Source: Company, NRA Capital
Depreciation of the SGD has slowed. Based on quarterly SGDUSD rates since 2014, the SGD depreciated the most against the USD during 4Q14, 1Q15 and 3Q15. During those quarters, the average daily SGDUSD rate fell by 3.4%, 4.5% and 3.5% compared to the preceding quarter. Compared to the average rate of 3Q15, the SGDUSD rate has depreciated by 1.0% during 4Q-to-date. As the year-on-year decline in 4Q-to-date is about 7.7% compared to 4Q15 and 10.0% for 3Q, margin pressure from the weaker SGD is likely to result in smaller declines in margins.
Cost improvements to drive future growth in 2016. In addition, Pan-United has been cutting costs to improve profitability, particularly via operational and productivity improvements. Specifically, areas where Pan-United can derive cost savings include tighter planning of logistics for just-in-time delivery of products and careful management of inventory to minimize excessive stockpiling and reduction of spare parts to eliminate redundancies. We noticed that inventories has fallen from S$33.0m as of 31 December 2014 to S$30.5m as of 30 September 2015.
Year-on-Year Depreciation of SGD against USD
*Based on average rate per quarter. 4Q15E rate is based on average quarter-to-date rate. 1Q16E rate is to reflect the existing rate of 1.4195 as of 13 November 2015.
Source: Bloomberg, NRA Capital
Malaysia plant to increase vertical integration. To further improve Pan-United’s long term cost advantage, the company has invested in a plant in Malaysia that will supply cementitious material for internal use and external sale. The plant will allow Pan-United to increase the proportion of internally sourced cementitious materials to drive margin expansion in Singapore. The plant is expected to be completed and be operational by 1Q17.
Raw material, subcontract and other direct costs % of revenue
Source: Company, NRA Capital
Key risk
The risk against Pan-United is if selling prices and/or the SGDUSD rate worsen against the company, rather than improve as anticipated by us. During 4Q14, EPS fell by 71% year-on-year to 0.6 cents, before rebounding in 2015. If EPS had remained at 0.4 cents per quarter for a year, Pan-United’s share price may potentially drop to 38.5 cents based on 16x PE. The company currently trades at 16x trailing 12-month PE. That said, we reiterate that selling prices have since stabilized and FX risk is now lower.
The other risk is the slowdown of the China economy, which may impact the company’s port division. Nonetheless, Pan-United’s port is well situated inland and is a major transit point for goods bound for Western China. According to the company, volume has remained healthy with steady growth of 18% at the port on a nine-month basis. Revenue grew by 24% year-on-year due to higher handling rates. Much of the key cargo such as pulp & paper are bound for domestic use, while steel products for export continue to provide decent volume – unless the foreign governments impose anti-dumping regulations on PRC steel products. That said, this risk is not eminent and there is no certainty at this juncture about the implementation of such regulations.
Dividend yield likely to be maintained
Based on the 2014 year-end share price of S$0.840, Pan-United’s dividend of 4.25 cents provided a yield of 5.06%. At the current share price of S$0.610, we calculated that Pan-United need only provide a final dividend of 1.6 cents (interim dividend of 1.5 cents) to maintain dividend yield at 5.06%, which amounts to about S$8.96m of cash. During 3Q, the company generated net operating cash flow of about S$6.9m.
Our view - Positive fundamentals, albeit weakened by transient external factors
We like Pan-United for its strong market presence in Singapore and focus on improving its cost advantage – leveraging on its strong know how in the basic building resources business. The bright spot of 2015 is that Pan-United has managed to grow volume for both RMC and cement. Such volume growth is positive for market share, and positions the company for faster and more extensive rebound when external headwinds abate. Prudently assuming that Pan-United maintains EPS at 1.1 cents over the next 12 months, forward 12-month EPS will be 4.4 cents, translating to a valuation of S$0.705 based on 16x P/E.