Pan United Corporation - Phillip Securities 2022-12-12: Construction Recovery Slower Than Expected

• Workplace incidents hampered the recovery. As a result of the Heightened Safety period imposed by the Ministry of Manpower (MOM), local construction projects are, in general, progressing slower than expected. 2022-to-date contracts awarded is down 9.4% y-o-y.
• According to data from the Building and Construction Authority (BCA), demand for ready-mixed concrete (RMC) for the first 9 months of 2022 was ~8.8mil cu/m, about 8% lower than our estimate and up 14.2% y-o-y.
• Maintain BUY on Pan United (SGX:P52) with unchanged target price of S$0.54. We trim FY22e/FY23e earnings forecast for Pan United by 12%/11% respectively on account of the Heightened Safety period imposed. Our target price for Pan United is unchanged as we roll forward our valuations, still based on 12x FY23e P/E, a 20% discount to its 10-year historical average P/E on account of the still uncertain business environment.

What's new for Pan United

• According to data from the BCA, demand for ready-mixed concrete (RMC) for the first 9 months of 2022 was ~8.8mil cu/m, about 8% lower than our estimate but higher than ~8.5mil cu/m in the same period last year. The construction recovery has slowed, with contracts awarded for the first nine months of 2022 5.3% lower than 2021. Construction progress payments for the same period, however, rose in 2022 by 14.2%.
• No results update from Pan United as it has moved to half-yearly reporting.

The Positives

Construction progress payments for first 9 months of 2022 rose 14.2% y-o-y.

• We believe construction progress payments were higher due to the relaxation of border restrictions on the inflow of migrant workers in 2022. This is an important metric, as it tracks work done in the sector.

The Negative

Workplacefatalities hampered recovery.

• As of 1 Sept 2022, the number of workplace fatalities stands at 36 for the whole of 2022, up from the 28 workplace fatalities reported for the first six months of 2022, many of which were in the construction industry. As a result of the Heightened Safety period imposed by the Ministry of Manpower (MOM), local construction projects are, in general, progressing slower than expected. The time-outs and punitive measures imposed on the sector has slowed construction progress.

Contracts awardedfor first 10 months of 2022 9.4% weaker than 2021.

• Despite the strong pipeline of projects, contracts awarded slowed in 3Q22 as workplace fatalities hampered project progression rates.

Outlook

Construction sector expected to be weighed down by higher operating costs; tailwinds intact.

• The prospects of the local construction supply chain is expected to be weighed down by higher operating costs, particularly for skilled labour and energy. The operating climate is likely to be complicated and burdened by high financing cost and heightened credit risks on the back of an inflationary and rising interest rates environment.
• Construction materials costs have stabilised in 3Q22 after surging in the first half of the year. The price of ready-mixed concrete (RMC) has risen by 21.6% from the beginning of the year to $118 .60/tonne 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. That said, prices have remained stable in the last six months.
• Despite the near-term headwinds, we believe the construction recovery remains intact. 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. Changi Airport’s Terminal 5 project will resume after being put on hold for two years due to the COVID-19 pandemic.
• BCA’s forecasts of average construction demand over 2022-2026 of $25-32bn will support construction demand in the next few years.
• 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 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 RMC demand in Singapore.

Pan United – ESG

• Pan United has committed to supplying only low-carbon concrete by 2030 and pledged to offer carbon-neutral concrete products by 2040. It is committed to reducing its carbon output by 50% from 2005’s level by 2030. The company has already started its journey towards being more carbon-neutral. In 2021, Pan United provided Surbana Jurong with concrete that was created with carbon mineralisation technology. As the concrete is mixed, carbon dioxide is injected to form calcium carbonate. This not only captures and stores carbon, but also strengthens the material.
• We believe its move to more green products is not only more sustainable for the environment but also opens up new markets for them. In January this year, Pan United signed a memorandum of understanding with Shell to collaborate on ways to repurpose carbon dioxide and industrial waste from the oil major’s Singapore operations as raw materials to produce low-carbon concrete.

Maintain BUY on Pan United with unchanged target price of $0.54.

• We trim FY22e/FY23e earnings forecast for Pan United by 12%/11% respectively on account of the Heightened Safety period imposed. We believe 1H23 will see a low-key start followed by more robust project activity levels in 2H23 anchored by strong local construction demand backlog.
• Our target price for Pan United is unchanged from $0.54 as we roll forward our valuations to 12x FY23e P/E, still at a 20% discount to its 10-year historical P/E on account of the still uncertain business environment.
• Stock catalysts are expected from higher contract volumes and better margins.