Pan United (SGX:P52) – A Concrete Investment

The SG stock market’s construction sector is like a wasteland. It is incredibly hard to find a compelling stock to buy and hold. What you normally find are companies with low margins, poor cashflow ratios, high debt and heavy capex.

Pan United (SGX:P52) is a different story. As Singapore’s leading ready mix concrete supplier, they have strong cash generating ability (P/CF 6.65), high dividend yield (4%), low EV/EBITA (5.9) and is profitable for the past 5 years. Even in the midst of the pandemic, they managed to eke out a tiny profit of $1mil, showing how resilient they are in the business.

With the construction sector finally showing signs of life after two dreadful years, I think Pan United will be able to ride on the forefront of this recovery. As we patiently wait for the major infrastructure projects like the Cross Island Line, Jurong Lake District and many more to commence, they offer a dividend of 3.7% yield ( I know that it is not enough to offset inflation). It is one of the stocks that I do not mind holding on for the long term.

Pan United Overview

Pan-United is the largest provider of ready-mixed concrete (RMC) in Singapore. They also have a growing footprint in Vietnam, Malaysia and Indonesia. More than 90% of its revenue is generated from Singapore.

Pan United has two business lines: concrete and cement (C&C) and trading and shipping.

C&C contributes the bulk of Pan United’s Revenue at around 98% and they have presence in Singapore, Vietnam, Malaysia and Indonesia.

Business Overview

1) Specialised Concrete

Pan United is also at the forefront of concrete technology, they are an industry leader in concrete innovation and process technologies. You may ask, “It’s just concrete right? What space is there for R&D?” The infographic below shows how their specialised concrete contribute to Singapore’s construction landscape. For more in-depth information about their product offerings, you may also visit their website.

Specialised Concrete

2) Process Technologies

Other than innovation in concrete technology, Pan United has also improved on their operational processes and introduced electronic delivery orders (eDO), contactless concrete delivery and adopted technology platforms that increased their efficiency and productivity.

Pan United’s average net profit margin for the past 5 years is 1.66%. In FY21, their net profit margin improved to 3.2% despite higher subcontract cost, raw material cost and other direct cost (inflation guys). I believe that this is due to their investment in process technologies which is beginning to bear fruit.

Financial Statements

My first impression of Pan United’s financial statements is that they are a very resilient company.

Everybody knows the construction industry in Singapore was decimated during the Covid pandemic, but Pan United managed to breakeven. This is because during the circuit breaker, there are still projects that are allowed to continue under tight control measures.

The following year during the recovery in 2021, they are met with labour and material shortage. But they still managed to improve their net margins to 3.2%. This shows that their ready mix concrete prices are elastic and they are able to pass the increase in cost to their customers effectively.

Let’s take a look at their ratios.

ROA and ROE is low because this business is asset heavy. Pan United have a lot of plants and machinery including their fleet of concrete mixers. They require these to be able to provide efficient service to their customers.

The same goes for their margins, their depreciation cost amounts to about $20mil/year. This takes a huge chunk off their net income profit.

Their balance sheet looks healthy with their current and quick ratios above 1. They also managed to keep their debt low, with a debt/equity ratio less than 0.5. From their 2021 annual report, their total debt and cash stands at around $66mil and $62mil respectively. Still pretty safe in my opinion.

In the construction industry, cash flow is always an issue. The Building and Construction Industry Security of Payment aims to improve cash-flow of the construction industry with the maximum 21 days of payment response + 35 days payment term. (https://www1.bca.gov.sg/docs/default-source/docs-corp-regulatory/sop_brochure.pdf?sfvrsn=3777e0ae_4)

However, we see that Pan United’s Cash Conversion Cycle is still within an acceptable 30-45 days range (I treat FY20 as anomaly due to Covid).

FY22 6mth Interim Results

Their most recent Interim results is further supporting proof that recovery is on its way. The Group recorded a 22% year-on-year (yoy) increase in revenue to $338.1 million, primarily driven by the Concrete and Cement (C&C) business, supported by the recovery of the construction industry in Singapore and higher selling prices for ready-mix concrete.

Note that I highlighted “higher selling prices” in bold. In other words, they have been able to increase their prices of ready-mix concrete to pass on their increased cost of raw materials.

All in all, their financials looks pretty stable despite the low margins. However, I believe with the initiatives that the management is introducing. :ike the process technologies and the adoption of specialized concrete that has higher margins will help improve the numbers.

Singapore Construction Demand

The pandemic in 2020 saw the lowest building demand in more than a decade. The total demand for construction increased by more than 40% in 2021. This rise was projected because most work sites did not reopen until August 2020 after the nation had a two-month circuit disruption in Q2 2020. Unsurprisingly, infrastructure projects saw the fastest growth, propelled by initiatives like the Jurong Region Line and Cross Island Line Phase 1 stations, viaducts, tunnels, and depot by the Land Transport Authority (LTA).

Residential Demand

By 2021, the public residential sector has increased from $2.8 billion to $5.5 billion. In 2021, the Housing & Development Board (HDB) launched more than 17,000 apartments, up from 16,800 in 2020. Like many other projects, the development of numerous Build-to-Order (BTO) apartments was impacted. The majority of public housing projects experienced delays of six to twelve months. The residential market remained quite strong in 2020 despite a recession in the economy, and high demand has driven up the prices of both private real estate and HDB resale properties. Private real estate prices rose 7.3% year over year (YOY) in Q3 2021, while HDB resale prices rose for the sixth straight quarter and rose 12.3% YOY.

Land Sales

Seven Government Land Sales (GLS) sites were given in total last year, with developers engaging in aggressive land bidding at some of the locations. Jalan Anak Bukit, where an integrated bus interchange will be built, is one of the larger sites transacted. The Marina View White Site, which was awarded for S$1.5 billion, is the largest GLS land sale to have taken place since August 2017. It will comprise developments for homes, hotels, and businesses. A positive number of bids were received for the two GLS that were recently granted. This is the first since new cooling measures were announced in December 2021. This indicated that developers are still eager to increase their inventory, albeit with a more cautious approach.

Market Outlook

Although the demand for building last year has increased from its lows in 2020, there will be many challenges in the next quarters. This year, BCA expects demand for construction to be in the range of S$27 billion to S$32 billion.

There is still a chronic scarcity of staff. Massive backlogs in shipping ports around the world affect supply networks. The cost of construction materials is also rising. Since the start of the epidemic, the cost of raw materials has increased significantly across the board. Due to supply chain volatility, prices for ready-mixed concrete, concreting sand, and granite have all increased by more than 10% since last year.

From Surbana Jurong’s 2022 market review and outlook, the BCA Tender Price Index climbed by 13.9% in 2021 compared to 2020. SJ continue to see increases between 10% and 30%. It may take another nine to twelve months for tender prices to stabilize. This will be partly due to the gradual removal of risk pricing for pandemic’s measures.

However, I expect tender prices to continue moving upward. After the pandemic, we are facing rising construction material costs, logistic costs, and a persistent shortage of manpower. Labour scarcity is also an issue for Pan United. They will be forced to charge more for labor and have trouble keeping employees.

Pan United Valuation

Pan United’s EV/EBITA is 5.9 currently and is expected to improve for FY22. Their 10yr average EV/EBITA is around 8x. This means that at the current share price, there is still some upside.

Conclusion for Pan United

The financial performance of Pan-United for FY2021 has shown a significant improvement. I also expect growth in FY22. In addition, the dividends given out to shareholders have been able to return to their pre-covid levels.

Investors will need to pay close attention to the management’s long-term capacity to control operational expenses given the inflationary climate. As they operating margins are low. One of my main concern is its ability to cope with ongoing labor shortages, higher raw material costs, fluctuating freight and energy prices, as well as increased raw material expenses. This can be mitigated if they are able to pass on the cost to their customers effectively.

I am bullish on the construction sector but selective on the companies to invest in. As a supplier of one of the major components in construction, Pan United will benefit directly from the increase in Singapore construction demand over the years. While waiting, why not collect dividends too?

Cheers.

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