Starting a series where I will screen for possible investment opportunities before delving deeper into the numbers. The analysis will be primarily qualitatively focused.
This column is written by @gordon_ong.
-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
+ BCA forecasted that public-sector spending will increase during 2016-2020. Due to the time lag between securing contracts and beginning construction, there is a delayed effect on demand for RMC and cement. Hence, there is still hope for a pickup of RMC and cement prices.
+ Better-than-expected recovery in property outlook, evident by growing demand for new properties, en-bloc sales and recent run in prices for property developers with significant unsold stock and landbanks such as CDL and UOL.
— Despite better outlook for public and private construction, demand and price for RMC and concrete has remained depressed for the first half of FY2017. This is due to stiff price competition and lower raw materials cost. For FY2017, BCA has projected lower RMC demand in Singapore of 12.0 – 13.5 million m3 compared to 14.0 million m3 in 2016. Market conditions are expected to remain challenging.
– Downward pressure on RMB, causing SGD-denominated cash flows from the port to be affected.
– Tight reliance on foreign manpower makes it highly susceptible to foreign manpower rules and higher levies, serving as a long-term compressor of profit margins
+ Market leader in supply of construction materials (RMC and cement) in Singapore, with 40% market share for both. However, market dominance does not offer protection from price competition and fluctuation in RMC and concrete prices.
++ Strong reputation built over many years. It has a strong track record of supplying concrete for many government projects; landmark projects include Changi Airport T3, Helix Bridge, MBFC, Gardens by the Bay, SUTD etc. It also has a track record (albeit weaker) in the private sector, supplying concrete for The Interlace and Tanjong Pagar Centre.
+ Strong and impressive order book pipeline e.g. Changi Airport T5, Jewel, Thomson-East Coast MRT Line, new healthcare facilities and public housing projects
+ Vertically integrated with quarrying, aggregates and logistics services. Despite fall in RMC and cement revenue, cost savings and margin improvement cushion fall in profits. Recently built slag grinding plant in Malaysia also will capture excess slag from Singapore and turn it into cementitious material, enhancing vertical integration.
++ Effective R&D department, over 300 RMC product offerings created by Innovation Centre within just 4 years of incorporation. Global leader in concrete technologies, awarded “Leader” certification by Singapore Green Building Council in sustainable concrete products.
+ Identifies higher margin segments to capitalise on diverse product offerings – coloured concrete, green concrete and high-strength concrete are some of the unique R&D products frequently demanded by customers.
+ Product mix focuses on replacing natural raw materials with recycled byproducts. Serves to cut raw material costs and highlight company’s strength in sustainability products.
+ Good LT strategy of expansion into SEA markets, with aim of eventually contributing 30-40% of revenue. Already established foothold within Vietnam.
+ Strategic port at entrance of Yangtze River, diverse cargo mix of pulp and paper, logs, steel and containers. Offers comprehensive port and logistics services.
— Too reliant on C&C and RMC demand and prices, slowdown affects the entire income statement significantly. Entirely reliant on Singapore’s construction sector outlook.
– Low margins within core cement business, further price competition from competitors
– Container volumes and handling margins from the port are also diminishing
– Spinoff of profitable port business causing EPS dilution, although reduces debt simultaneously
— High valuation at P/E LTM (normalised) of 20.85x and P/B of 1.47x despite subpar recent results – Falling revenue and operating income due to lower selling prices
– High D/E at 93.5% in rising interest rate environment
Wide moat from market dominance in SG, vertical integration and unique R&E technologies. Capable management with forward-looking ideas to realign business away from stiff competition and capitalise on green initiatives by public sector. However, high valuations and uncertainty from impending listing of profitable port. Recommended wait for port demerger, Pan U to become a pure play on cement and concrete, and proper price discovery. Preferably time entry when market sentiments worsen and price fall to around 13x P/E LTM (normalised), and/or cement market shows signs of mid-term recovery driven by increase in government and residential projects. In short, it’s a good company at a high price.
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