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PhillipCapital raises TP on Pan-United by nearly 50% as construction recovery quickens

Jovi Ho
Jovi Ho6/14/2022 12:37 PM GMT+08  • 5 min read
PhillipCapital raises TP on Pan-United by nearly 50% as construction recovery quickens
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With the construction sector recovery gaining pace, demand for ready-mixed concrete will drive Pan-United Corporation (Pan-United) into a net cash position by 1HFY2022F ended June, says PhillipCapital Research senior analyst Terence Chua.

“With an approximately 40% market share in the industry, we continue to see Pan-United as a key beneficiary of the construction sector recovery. Pan-United’s batching plants still have capacity to take on a 10%-15% increase in ready-mix concrete (RMC) demand in Singapore,” writes Chua.

In a June 13 note, Chua is maintaining “buy” on Pan-United with a higher target price of 68 cents from 46 cents previously. The new target price represents a 64.7% upside.

According to data from the Building and Construction Authority (BCA), demand for ready-mixed concrete (RMC) for the first three months of 2022 was 5% higher than the same period in 2021.

The construction recovery remains on track with progress payments billed for 2021 at 32.5% higher than 2020.

Contracts awarded for the first three months of 2022 were also 33.2% higher than 2021.

See also: CGS-CIMB lowers China Sunsine's TP to 60 cents due to potentially weaker FY2023

Rising concrete price

The price of RMC has also risen by 8.4% from December 2021 to April 2022, driven by a combination of higher raw materials costs and demand.

The higher cost of its components like sand, freight and bunker fuel cost have all driven up the price of RMC.

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For instance, the average daily charter hire of the Supramax and Handysize has risen from an average US$28,650 ($39,877.22) per day in 2021 to US$31,350 today.

The construction recovery is ahead of Chua’s expectations. “We upgrade the forecast of total RMC volume to 13.5 million cubic metres for 2022 compared to 12.8 million cubic metres previously. With the construction sector recovering at a faster pace in the first quarter of the year than we expected, we upgrade our forecast of total RMC volume for the year.”

He adds: “We expect construction demand to remain robust for the next few years, supported by strong demand for public housing and the backlog of projects from Covid-19 delays.”

According to Chua, BCA has forecast annual construction demand of $25 billion - $32 billion from FY2023-26 and these forecasts do not include the resumption of Changi Airport Terminal 5.

Singapore’s Housing Development Board (HDB) has announced that it will ramp up the supply of new build-to-order (BTO) flats over the next two years to meet the strong housing demand from Singaporeans. It plans to launch up to 23,000 flats per year in 2022 and 2023, which represents a significant increase of 35% from the 17,000 flats launched in 2021.

Minister for Transport S Iswaran also recently announced that Changi Airport’s Terminal 5 project will resume after being put on hold for two years due to the Covid-19 pandemic.

Manpower shortage resolved

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With Singapore’s borders gradually reopening, work permit holders have returned to the hardest-hit sectors such as construction and marine shipyard. According to the Ministry of Manpower, work permit holders in these sectors now account for more than 90% of pre-pandemic levels.

“We expect that the manpower tightness at PanU has now been fully resolved and staffing can be ramped up should the group require it to meet the rising demand in the next few years,” writes Chua.

With the faster pace of recovery in 1QFY2022, Chua has revised upwards our forecast for the group. “We now expect Pan-United to report free cash flows of approximately $14 million for 1HFY2022, which will be used to repay down some $5 million in loans. We expect this to accelerate the group’s move into a net cash position by 1HFY2022.”

Supply chain risks

That said, supply-chain disruptions and volatile freight costs squeeze margins. “With the rapidly rising price of RMC, we continue to watch for receivables risk in the sector,” says Chua.

General provision margin was slightly weaker for 2HFY2021 as raw materials price rose at a faster pace than the average selling price, says Chua. Average selling prices (ASPs) are 8.4% higher compared to December 2021.

PanU also faced disruptions in raw-material supplies and had to search for alternatives. Supplies from new sources require lead times of a month for BCA testing before they can be imported. This hampered its ability to fulfil contracts.

With coal prices up 135% year to date, we believe cement prices will remain elevated. We believe the rising cost of RMC is a potential concern, though this is mitigated by the group’s ability to pass these costs to its customer and trade credit insurance, Chua adds.

In the near term, projects in the pipeline that will likely support the group’s growth are the Singapore Science Centre’s relocation, the Toa Payoh integrated development, Alexandra Hospital redevelopment, Bedok’s new integrated hospital, Phases 2-3 of the Cross Island MRT Line and the Downtown Line’s extension to Sungei Kadut.

“With an approximately 40% market share in the industry, we continue to see PanU as a key beneficiary of the construction sector recovery. PanU’s batching plants still have capacity to take on a 10-15% increase in RMC demand in Singapore,” writes Chua.

He raises FY2022F/FY2023F earnings by 35%/26% respectively on account of the higher demand for RMC brought about by the construction recovery.

As at 12.30pm, shares in Pan-United Corporation are trading 0.5 cents higher, or 1.16% up, at 43.5 cents.

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