1Q FY14 Results

Pan United Corp’s (PUC) 1QFY14 results came in a tad disappointing, falling 5.4%y-y, despite all divisions – Basic Building Resources (BBR), Ports & Logistics, Shipping – contributing to a 7%y-y revenue growth.

How do we view this?

Main culprits: we underestimated (1) the full extent of the temporary granite export ban by Indonesia in Feb, which caused PUC to source for granite from farther afield and from SG govt stockpiles, resulting in a 10%y -y increase in raw materials; and (2) the extent at which the push for productivity in the construction sector has resulted in slower output despite record demand.

With regards to (1): the ban was lifted in March and PUC began tapering the more expensive granite, while increasing usage from its own Indonesia quarry. As RMC prices are expected to taper at a slower pace than granite costs, some of the lost margin is expected to be recovered going forward.

Of greater concern to us is (2): that industry wide labour tightness, shorter work hours, has resulted in lowering overall utilization of BBR division’s business, as most contractors are unable to squeeze out productivity gains.

Nonetheless, Management is fairly expectant that the rest of the year will see better results from the BBR division.

In terms of demand backdrop, the BBR division will see a longer, rather than faster, demand growth cycle as projects take longer to complete, despite construction demand at record levels.

As such we have had to lower our earnings expectations next 3 financial years, from 9.1c to 8.3c FY14e, 10.3c to 9.1c FY15e, and 12.2c to 11c FY16e.

Port & Logistics division is on track for the integration of Changshu Changjiang Int’l Port (CCIP) with Changshu Xinghua Port (CXP). Management is optimistic to halve CCIP losses this FY. We expect breakeven by middle of next FY and meaningful contribution from CCIP by FY16.

Investment Action

The competitive strengths of PUC remain very much intact – one-third market share in Ready Mixed Concrete in SG, and for CXP-CCIP a duopoly position in the Suzhou-Wuxi-Changshu region.

Upside risk outweighs downside risks going forward as CXP-CCIP is a key earnings growth driver (see report dated 27 th Feb 2014).

Maintain “Accumulate”, with a TP of S$1.33 based on a 12.1x peg to FY16e EPS. PUC’s average valuation over its last 2 full year results is 12.1x, which better reflects the market’s understanding of the current business.

Source: Phillip Securities Research - 16 May 2014