Analysts from CGS-CIMB Research and SAC Capital are positive on Pan-United’s prospects.
On March 29, CGS-CIMB analysts Kenneth Tan and Ong Khang Chuen have initiated “add” on Pan-United Corporation with a target price of 56 cents as it sees the ready-mix concrete (RMC) supplier as being a beneficiary of Singapore’s multi-year construction cycle.
The target price is pegged to an FY2023 EV/EBITDA of 6.6x based on a discount of around 10% compared to its peers, the analysts say.
Pan-United Corporation is the largest RMC supplier in Singapore with a market share of around 40% as at end-FY2021.
In their report, Tan and Ong predict that Singapore’s construction industry is set for a strong recovery due to accelerated construction works, easing labour shortage and healthy demand from new projects.
The Building and Construction Authority (BCA) has also forecasted a growth of 11% to 23% y-o-y in construction output for the FY2022, note the analysts.
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In addition, the BCA also expects demand for RMC to reach a growth of 7% to 20% y-o-y in FY2022, its highest level since 2017.
“With the rollout of mega infrastructure projects (potentially Changi T5 and the Integrated Resorts expansion), we expect sustained construction demand in Singapore over the next three years,” write Tan and Ong.
In addition, Pan-United, which is a leading producer of high-grade green concrete that is designed to reduce carbon emissions, is also well-placed to blend sustainability and tech into the construction sector.
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The company has leveraged its research and development (R&D) capabilities to develop over 300 specialised concrete products since 2012.
On this, the analysts say they “expect increased demand for higher grade concrete in Singapore driven by larger and more complex projects, and greener buildings”.
“Pan-United has also self-developed an in-house digital logistics platform Artificial Intelligence for RMC (AiR), which helped yield cost savings by streamlining operations and cutting manpower wastage,” they note.
In the FY2022, the analysts expect Pan-United’s revenue for concrete and cement (C&C) to grow 21% y-o-y to $692 million as construction activities resume across its key markets.
“Coupled with gradually easing labour shortage, we expect C&C EBITDA margins to sustain at 8.8% in FY2022 (versus FY2021’s 8.7%),” they write.
“This translates to strong earnings per share (EPS) growth of 31% y-o-y in FY2022. Current valuations look attractive at 3.9x FY23F EV/EBITDA, [around] 1 standard deviation below its 10-year historical mean,” they add.
To this end, Ong and Tan believe that a dividend yield of 5.4% is sustainable, assuming dividends of 2.1 to 2.3 cents in the FY2022 to FY2024. This is due to the company’s strong cash-generating capabilities and net cash position, they add.
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According to them, a faster-than-expected recovery in construction activities, the successful commercialisation of AiR and continued share buybacks are re-rating catalysts for the counter. Meanwhile, margin pressures should the company fail to pass on higher input costs, as well as a slowdown in the demand for construction are downside risks.
In her March 29 report, SAC Capital analyst Lim Shu Rong has maintained her “buy” call on Pan-United due to the company’s “brightening outlook”.
Lim has also given the company a higher target price of 53 cents from 50 cents previously as Pan-United’s revenue and gross profit for the FY2021 ended December stood largely in line with her estimates.
Pan-United’s net profit of $18.7 million surpassed her estimates by 12% due to the higher share of profits from associates and government grants.
While construction works are gaining pace, with consumption of RMC forecast to come within 12.5 – 14 million cubic metres from FY2021’s 11.6 million cubic metres, cost of raw materials remain a concern, notes Lim.
The price of cement has been rising steadily since July 2021 to $98 per tonne in January, up 3%.
“With coal prices up [around] 178% y-o-y, cement prices are unlikely to correct in the near term. Higher costs will be reflected in RMC prices,” says Lim.
“January’s price of $104 per cubic metre is +10% higher [compared to that of] January 2021’s prices. RMC prices will also be further propped up by robust demand as FY2022 forecasted construction demand returns to FY2019 level of $27 billion - $32 billion,” she adds. “The coming years (FY2023- FY2026) also have an average annual demand of $25 billion - $32 billion and this have yet to include the development of the 2 integrated resorts ($5 billion to $7 billion) and Changi Airport T5,” she continues.
In Vietnam and Malaysia, where Pan-United’s subsidiaries make up 7% of its total revenue, the construction sector in the former is forecasted to grow at a compound annual growth rate (CAGR) of 8.71% in the next five years.
In Malaysia, “we would only get a clearer picture of its spending plan for major infrastructure projects post-election,” says Lim.
“In the meantime, MRT3 Circle Line project of RM30 billion ($9.66 billion) is slated to open for tender this coming May. Timely rollout of this major project would help to lift Malaysia’s construction outlook,” she adds.
In her report, Lim has kept her topline estimate for the FY2022 unchanged. She has, however, upped her earnings estimate to account for a higher share of profit from Pan-United’s associates due to the upward trend in coal prices.
Her target price is pegged to Pan-United’s pre-pandemic ratio of 12.3x for the FY2019.
As at 3.23pm, shares in Pan-United are trading 3 cents higher or 7.79% up at 41.5 cents.
