Analysts are remaining positive on Pan-United with raised target prices after the company’s financial results for the 2HFY2023 and FY2023 ended Dec 31, 2023, outperformed their expectations.
CGS-CIMB Research (now CGS International) analysts Kenneth Tan and Ong Khang Chuen have kept their “add” call as Pan-United’s net profit of $20 million for the 2HFY2023 was a “solid beat” with the company’s full-year net profit coming in 19% above their forecasts. Pan-United reported a net profit of $36.5 million for the FY2023.
In FY2024, Tan and Ong expect Pan-United to sustain its elevated revenue and margins thanks to the strong demand for construction and improved operating leverage.
“We think elevated ebitda margins could sustain into FY2024 – FY2025 as volume growth should drive improved operating leverage,” they write in their Feb 8 report.
The Building and Construction Authority (BCA) expects the total nominal construction output – measured by progress payments to increase to $34 billion to $37 billion in FY2024, which is the highest levels seen since 2015. Output for FY2023, for comparison, stood at $34.8 billion.
“We believe this to be driven by: healthy construction demand, elevated industry orderbooks, and productivity improvements following the cessation of the Heightened Safety Alert. BCA expects healthy construction demand in 2024 with contracts awarded of $32 billion - $38 billion (2023: $33.8 billion), and at $31 billion - $38 billion per annum (p.a.) through 2025 to 2028,” the analysts write.
In addition, the robust sector fundamentals should benefit Pan-United’s ready-mix concrete (RMC) sales volumes in Singapore, given its leading market share of around 40%, according to the company.
To this end, Ong and Tan have raised their FY2024 and FY2025 earnings per share (EPS) by 18% to 19% as they factor in better concrete margin assumptions, higher depreciation expenses from increased capital expenditures (capex) in FY2024 and lower interest expenses from reduced net gearing.
The analysts’ target price has also been lifted to 64 cents from 55 cents previously as they roll their valuations to 5.8 times 2025 EV/ebitda based on the average seen in 2012 to 2014, which is Singapore’s previous construction upcycle. The higher target price also comes off the back of the higher EPS estimates.
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As at the analysts’ report, Pan-United was trading at 38 cents, which they deem as “attractive” at 2.7 times 2025 ev/ebitda, in their view. At the time, the company is also trading some 1.5 standard deviations (s.d.) below its five-year historical mean.
PhillipCapital analyst Peggy Mak has also kept her “buy” call as Pan-United’s FY2023 profit stood 6% above her expectations.
Following Pan-United’s results, Mak likes the company’s prospects as it achieved a higher average selling price of 5% compared to the sector’s average of 1%.
The company’s stronger gross margins – at 20.8%, 1.9 percentage points higher y-o-y – is another plus. “We think the higher gross margin can be maintained, as low-carbon concrete products could gain wider acceptance, as a means to offset the higher carbon tax. In addition, demand for batching services, from which Pan-United earns a fee, is likely to be sustained. [The] Housing and Development Board (HDB) has committed to launch 20,000 to 23,000 units per year through 2025,” she notes in her Feb 13 report.
Finally, Pan-United saw an improved return on equity (ROE) of 16.5%, up from FY2022’s 11.0%. This is despite its net cash of $43 million on its balance sheet.
“[Pan-United] generated funds from operations (FFO)/share of 9.1 cents. We expect net cash to reach $58 million at end-FY2024, even with higher projected capex of $40 million to construct a new batching plant,” says Mak.
Another tailwind in Pan-United’s favour is the construction awards, which rose by 13.4% y-o-y to $33.8 billion in 2023, will translate into output in the next 12 - 18 months, thereby supporting output growth in 2024.
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“About 60% of these are public infrastructure projects, mitigating the risk of customer default. We expect a higher carbon tax to drive greater adoption of low-carbon products, further differentiating the RMC suppliers,” she says.
Mak has also raised her target price to 55 cents from 50 cents previously to reflect the company’s strong cash flow.
Pan-United’s total dividend of 2.3 cents for the FY2023 represents an annual yield of 5.6% based on the company’s share price of 41 cents as at Mak’s report.
Shares in Pan-United closed 1.5 cents higher or 3.61% up at 43 cents on Feb 20.
