Singapore seems to be always building. Despite being a small island nation, there are always some major constructions going on to rejuvenate Singapore’s environment. These include government-led public infrastructure projects such as the recently opened Thomson East Coast MRT Line, a slew of future MRT lines including Jurong and Cross Island lines, and the mega Changi Airport Terminal 5 project.

The private sector also chimes in their fair share of construction projects, led by the expansion and upgrading of both Marina Bay Sands and Resorts World Sentosa.

With increasing civil engineering and building works come with increased demand for construction materials. Concrete is one of the essential raw materials for constructions.

Would Pan-United Corporation Ltd (SGX: P52) stand to benefit from the growth in the construction sector?

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Pan-United’s refreshed corporate logo

Business Overview

Pan-United Corp claims to be Singapore’s largest provider of ready-mixed concrete, with a growing footprint in Vietnam, Malaysia and Indonesia. Locally, it has been involved in some large-scale construction projects. For example, the company supplied the largest Self Compacting Concrete Pour to Tanjong Pagar Centre, and lining more than 60km of the underground tunnel of Downtown and Circle Line.

Pan-United is also the top brand for concrete in the fast-growing Ho Chi Minh City. It secured numerous prestigious projects, including OneHub Saigon, a 12 hectares business and IT park space jointly developed by Ascendas-Singbridge and Saigon Bund Capital Partners.

While supplying ready mixed concrete seems like a traditional business, Pan-United has invested heavily in technology and vertically-integrated its capabilities in managing processes of sourcing, producing, supplying and logistics support of ready mixed concrete delivery.

Source: Pan-United corporate website

Pan-United’s Innovation Centre is believed to be the only independent private laboratory in Singapore to be accredited. Through extensive Research and Development, it has developed more than 300 highly specialised concrete solutions. These include the Pan-United Rapid, a concrete that sets within an hour that can be used for quick recovery of airport taxiways and aprons; and Pan-United MIC, an anti-bacterial concrete with excellent resistance to acid corrosion ideal for the deep tunnel sewerage system.

Pan-United operates The Command Centre in-house that re-designs processes to improve operational efficiency. Customers’ needs are met through a single digital platform that delivers a seamless process. For example, the company launched Pan-United Mobile Booking for customers to order and track concrete deliveries on their mobile devices in 2018, 

Latest Earnings

Pan-United recently posted a decent set of results.

In Q4 2019, its revenue was $169 million, down 20% from 2018. However, due to lower raw material cost, sub-contract cost and other related expenses which fell 26%, its net profit was up 167% to $5.4 million.

For Financial Year 2019, Pan-United recorded a revenue of $768 million, an 11% drop. Its profit before tax rose 220% to $21 million.

Balance Sheet

As of end-2019, Pan-United recorded a decrease in both current and non-current loans and borrowings. In total, these debts fell from $126 million in 2018 to $106 million. Against an equity of $210 million, Pan-United has a Debt to Equity ratio of 0.50.

In fact, it is worth noting that the company’s Debt to Equity ratio has been generally trending down from about 1.1 just 3 years ago.

Pan-United past 6 years’ Total Debt to Equity Ratio. Source: Shareinvestor.com

Cash Flow

Pan-United churned out a net operating cash flow of $42.6 million in 2019. Should we look at the historical trend, the company’s cash flow generation ability has been healthy, with cash amount hovered between $25 million to $53 million.

The sharp drop in 2018 figure is attributed to a large decrease in ‘Payables, accruals and provisions’ which entails that the company paid off much of its payables and accruals that year. Unfortunately, I could not find more information related to this.

Pan-United past 6 years’ Net Operating Cash Flow. Source: Shareinvestor.com

Dividends

The management decided to share the fruits of its improved earnings with shareholders, by declaring a final dividend of 1.1 cents per share. The total dividend for 2019 would thus be 1.6 cents, up from 0.8 cents in 2018.

Pan-United past 6 years’ Dividend per Share. Source: Shareinvestor.com

Pan-United’s dividend trend has been falling from around 4 cents per share in 2014 to 0.8 cents in 2018. It is clear that the company does not have a consistent dividend-paying record.

Business Outlook

Management commentary on the business prospect. Source: Pan-United 4Q 2019 Earnings Report

As shown, management believes that Singapore’s total construction demand will remain strong in 2020, bolstered by a line-up of public sector civil engineering projects. This is almost certain to lead to increased demand for ready mixed concrete which Pan-United specialises in.

I am positive on Pan-United’s prospect. Based on its track record, the company supplied concrete to some of the iconic construction projects mentioned earlier. A familiarity with public sector projects, coupled with its advanced technology and research and development capability should enable Pan-United to capture a large market share.

Furthermore, its regional operations should see growth too. Vietnam’s construction sector is expected to grow from US$57.5 to US$84 billion in 2023, as its economy picks up to attract more investment flowing into its public infrastructure, tourism facilities and housing projects. Pan-United is well-positioned to capitalise on such growth.

Weakness

Ready-mixed concrete and cement, while an essential construction material, is a commoditised product. Apart from specialised cement solutions developed for specific constructions, the majority of projects require standard supplies. This means that Pan-United would be a price taker in the industry, charging its customers at the market prevailing price. Should the price of ready mixed concrete fall, (for example it fell to $83.30 per cubic metre in Dec 2017) Pan-United’s revenue may suffer.

Valuations

With a share price of $0.405 as of 19 Feb and Earnings per Share of 2.93 cents, Pan-United is being valued at a Price Earnings Ratio of 13.8 times.

Its dividend yield would be a modest 3.95%.

Conclusion

With an expanding construction sector underpinning the demand for ready mixed concrete, Pan-United should see robust revenue growth this year.

Nevertheless, it doesn’t mean all will be smooth-sailing for Pan-United. Management will need to continue delivering on its superior product offerings and execute its strategies well to meet customer demands that are evolving with larger and more complex construction projects.

Of course, we are still unsure how will the Covid-19 outbreak affect the broad economy, leading to slower construction activities. At least in the short term, we can expect some adverse impact as sounded by management above.

For now, I am satisfied with including Pan-United into my watch list and closely monitor its performance going forward.

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