CGS International (CGSI) analyst Kenneth Tan has maintained his “add” call on Pan-United Corporation at a raised target price (TP) of 75 cents from 72 cents previously in anticipation of the company benefiting from an industry upcycle in FY2025.
“The latest statistics from the Building and Construction Authority (BCA) support our view that Singapore construction activities remain on an upcycle. Based on January to November 2024 figures, we believe full-year construction output and contract awards exceeded the upper end of BCA’s guidance by around 3% and around 13%, respectively,” writes Tan in his Jan 13 note.
He adds: “Similarly, we think full-year industry ready-mix concrete (RMC) demand outpaced BCA’s guidance by around 3%, given that January to November 2024 demand was up by a robust 10% y-o-y.”
Industry strength remains primarily driven by the public sector, with large infrastructure projects including Changi Airport Terminal 5 and the Cross Island Line, while public built-to-order (BTO) housing projects under construction are set to ramp up to 150 concurrent projects by end-2025.
With this, Tan sees Pan-United as well-positioned to capture healthy construction demand in the coming years given its large exposure to the public infrastructure and residential sectors.
“We expect FY2025 to F2026 earnings before interest taxes depreciation amortisation (ebitda) margin to remain high at around 9%, backed by operating leverage from improving industry volumes, favourable project mix as infrastructure projects tend to use a higher proportion of higher-margin specialised concrete, and elevated RMC average selling price (ASPs).”
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If margins surprise on the upside, Tan calculates his FY2025 to FY2026 earnings per share (EPS) estimates to rise by around 3% for every 20 basis point (bps) increase in ebitda margin.
He continues: “For the upcoming FY2024 results, we expect Pan-United to report profit after tax and minority interests (patmi) of $40 million, with a higher full-year dividend per share (DPS) of 2.9 cents.”
With the company’s end-FY2024 net cash remaining strong at around 20% of its current market cap, Tan notes that the stock’s current valuation of 2026 earnings to enterprise value (EV)/ ebitda of 3.6 times is undemanding, and sees that there is space for the discount to narrow further as Pan-united benefits from industry and environmental, social and governance (ESG) tailwinds.
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Re-rating catalysts noted by the analyst include strong industry volume growth and sustained margin strength.
Conversely, downside risks include counterparty credit risks as well as an economic slowdown triggering weak construction demand and negatively impacting RMC sales volumes.
As at 3.36 pm, shares in Pan-United are trading flat at 56 cents.
