You are on page 1of 15

SINGAPORE Company Update Results SINGAPORE Company Report 4 August 2011

Initiating Coverage

MITA No. 010/06/2009 022/06/2011

BUY
Current Price: Fair Value: S$1.025 S$1.22

PEC Ltd
Cash rich; initiate with BUY
Specialist engineering service provider. PEC Ltd (PEC) provides engineering, project management and maintenance services to the oil & gas, petrochemical and pharmaceutical industries through its two main operating segments: (i) project works (FY10: 73% of total revenue) and (ii) maintenance services (FY10: 27%). It is led by Executive Chairman Ms Edna Ko, Group CEO Mr Robert Dompeling and Managing Director Mr Wong Peng, each having more than 20 years of experience in the oil & gas, and/or oil and chemical industries. Established track record. PEC's established track record helps the group to secure orders, and it has successfully executed a number of projects in Singapore, UAE and China. Its core competences are in the fabrication and installation of piping structures and engineering, procurement and construction (EPC) services for plants/terminals. Its major customers include multinational engineering firms and major oil companies, such as Chiyoda Corporation, ExxonMobil and Shell Eastern. Credit and liquidity risks. The group may be exposed to some credit and liquidity risks as it generally offers customers credit terms of 30-45 days. In the event that its customer defaults, the group may need to write off part of its debts. If the customer delays on its payments, the company may be faced with a liquidity squeeze. Geographical concentration in Singapore. PEC's operations are predominantly in Singapore, which accounted for 83% of its total revenue as of FY10. This makes it highly susceptible to event risk in Singapore. If competition within Singapore's Jurong Island persists or intensifies, the group's profitability may be heavily affected. Changes in Singapore's foreign labour policy may also lead in higher labour costs or manpower constraints. Large war-chest of cash. The group currently holds S$168m of cash and cash equivalent, amounting to 56% of total assets as of Mar 11. The large war-chest, largely due to unutilized IPO proceeds and internally generated capital, provides PEC with the flexibility to make large capital expenditures or look for strategic acquisitions or joint ventures if opportunities arise. Initiate with BUY. Our fair value estimate for PEC is S$1.23, based on a 6.4x industry-average PER on its forward 12-months EPS. We feel that current valuation is undemanding and the group has substantial cash (S$0.67 cash per share). Potential price catalyst could come from contract wins and/or successful acquisitions.

3500 3000 2500 2000 1500 1000 May-10

STI

1.4 1.2 1.0 0.8 PEC 0.6 0.4 0.2 May-11 Nov-10 Mar-11 Sep-10 Jan-11

Reuters Code ISIN Code Bloomberg Code Issued Capital (m) Mkt Cap (S$m / US$m) Major Shareholders Tian San Free Float (%) Daily Vol 3-mth (000) 52 Wk Range

Jul-10

PECL.SI IX2 PEC SP 260 260 / 217 33.6% 33.7% 769 0.811 - 1.380

(S$ m) Revenue Gross profit EPS (cts) PER (x) P/NAV (x)

FY09 440.5 91.4 NA NA NA

FY10 467.4 123.2 17.9 5.7 1.4

FY11F 420.6 113.6 15.9 6.4 1.2

Jul-11

FY12F 559.4 145.4 19.2 5.3 1.0

Chia Jiun Yang (65) 6531 9809 e-mail: ChiaJY@ocbc-research.com

Please refer to the important disclosures at the back of this document.

PEC Ltd

Table of Contents
Page Section A Company Background 3

Section B

Industry Outlook

Section C

SWOT Analysis

Section D

Financial Highlights and Analysis

11

Section E

Valuation and Recommendations

13

Section F

Disclaimer

15

Page 2

4 August 2011

PEC Ltd

Section A: Company Background Specialist engineering service provider. PEC was established in 1982 to provide maintenance services to a petroleum refinery in Singapore. Today, the group provides engineering, project management and maintenance services to the oil & gas, petrochemical and pharmaceutical industries. It has two main operating segments: (i) project works (FY10: 73% of total revenue) and (ii) maintenance services (FY10: 27%). Project works refer to engineering, procurement, and construction services for part of a plant or terminal. Maintenance services include tankage, static, rotating, and electrical equipment maintenance.
Exhibit 1: Revenue by business segments for FY10

Maint. 27%

Projects 73%

Source: Company data, OIR

Exhibit 2: Revenue by business segments

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

50%

39%

36%

24%

27%

50%

61%

64%

76%

73%

FY06

FY07

FY08

FY09

FY10

Projects

Maint.

Source: Company data, OIR

Page 3

4 August 2011

PEC Ltd

Experienced management team and Board of Directors. The group is led by Executive Chairman Ms Edna Ko, Group CEO Mr Robert Dompeling and Managing Director Mr Wong Peng, each having more than 20 years of experience in the oil and gas and/or oil and chemical terminal industries. The management team reports to the Board of Directors. Besides Edna Ko, Robert Dompeling and Wong Peng, the Board also consists of three other independent directors.

Exhibit 3: Management Reporting Structure

Source: Company, OIR

Exhibit 4: Board of Directors and Key Management Staff


Board of Directors and Key Management Staff Name Edna Ko Poh Thim Robert Dompeling Position Executive Chairman Group CEO Notes Responsible for overall strategy of PEC. Has been with PEC for over 20 years. Responsible for the operational, commercial and financial management, as well as business development and expansion. Previously held various appointment in Royal Dutch Shell and Royal Vopak. Spouse of Edna Ko Poh Thim. Responsible for day-to-day operations. Has been with the Group for more than 25 years. Founder and CEO of Maida Vale Consulting Group, a specialist investment and consulting firm.

Wong Peng Dr Foo Fatt Kah Chia Kim Huat Ho Yew Mun

Managing Director Lead Independent Director

Independent Director Partner at Rajah & Tann LLP and heads its China Practice Group, with more than 15 years of experience as a practising lawyer. Independent Director Executive Director at Ho Yew Mun Pte Ltd, a company providing business advisory business. Previously a managing director of DBS Group.

Source: Company, OIR

Page 4

4 August 2011

PEC Ltd

Section B: Industry Outlook Strong oil demand from China. After overtaking North America in oil consumption in 2007, Asia-Pacific now accounts for 31.2% of global consumption (as of 2010), compared to the former's 26.8% share. The main oil consumers are the US, China, Japan and India. Although China ranks behind US in terms of total oil consumption, its per capita consumption is only about a tenth that of the US (each person in China uses an estimated 2.5bbl of oil per year, in contrast to estimated 22.3bbl for the US). Hence, we believe that there is a huge potential for oil demand growth in China.

Exhibit 5: Asia Pacific has been the top consumer of oil since 2007
100,000 90,000 Total Asia Pacific Total Africa Total Middle East Total Europe & Eurasia Total S. & Cent. America Total North America
A s ia Pa c s urp as se d N. A me ric a in te rms o f co ns ump tio n fo r th e 1s t time in 2 00 7

80,000 70,000 60,000 '000 bbl/day 50,000

A sia Pac : 3 1.2 % of g lo ba l co ns umptio n in 20 10

40,000 30,000

20,000
N. Amer ica : 2 6.8% of g lo ba l

10,000 0 1989 1995 2001 2003 2009 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1991 1993 1997 1999 2005 2007

c on su mp tion i n 2 01 0

Source: BP 2011 Statistical Review of World Energy, OIR

Page 5

4 August 2011

PEC Ltd

Exhibit 6: Consumption growth trends of the world's top oil consumers

50% China 40% India US Japan 30%

20%

10%

0%

-10%

-20%
1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: BP 2011 Statistical Review of World Energy, OIR

Oil price volatility to remain. World production of oil has not been keeping up with the demand growth over the past several years, resulting in increased sensitivity of oil prices to supply dislocations. Compounding the problem is the increasing influence of speculators. This has led to higher oil price volatility. Unless there is a substantial easing in the demand-supply situation, we believe that volatility in oil prices would remain in the foreseeable future. How will capital expenditure be affected? Oil price volatility may discourage investments in the oil & gas sector, given the large upfront costs and considerably long payback periods required for infrastructure projects. However, if the economic recovery in the developed countries continues to gain traction and China's growth remains on track, we believe that oil prices should remain above US$75/bbl. This should sustain most capital expenditure in the oil and gas sector. If oil companies continue to invest in capacity building at major petrochemical hubs such as Singapore's Jurong Island, downstream EPC companies such as Rotary Engineering and PEC would benefit as some parts of the projects would inevitably flow down to this segment.

Page 6

4 August 2011

PEC Ltd

Section C: SWOT Analysis

Exhibit 7: SWOT Table

Strengths 1. Experienced management team 2. Established Track Record 3. Close relationship with customers Opportunities 1. Expansion into related Industries 2. M&A Opportunities
Source: OIR

Weaknesses 1. Geographical concentration 2. Credit and Liquidity Risk

Threats 1. Stiff competition 2. Labour constraints

Strengths Experienced management team. We believe that a strong management team is one of PEC's key strengths. As discussed in Section A, its executive directors are experienced in the oil & gas and petrochemical industries. The group has performed well over the past several years, achieving average return-on-asset and return-on-equity rates of 14.4% and 25.2%, respectively, for FY06-FY10. In our view, the group should continue to do well in the future.

Exhibit 8: Financial performance FY06-FY10

FY06 ROA ROE 10.1% 17.5%

FY07 20.5% 35.6%

FY08 14.3% 27.1%

FY09 11.5% 21.1%

FY10 15.6% 24.8%

Avg 14.4% 25.2%

Source: Company, OIR

Established track record. PEC's established track record has helped it to secure contracts. The group has successfully executed a number of projects in Singapore, UAE and China. In particular, the group's key strengths are in the fabrication and installation of piping structures and engineering, procurement and construction (EPC) services for plants/ terminals.

Page 7

4 August 2011

PEC Ltd

Exhibit 9: Significant projects

Source: Company

Close relationship with customers. PEC's major customers include multinational engineering firms and major oil companies, such as Chiyoda Corporation, Emirates Oil Company, ExxonMobil and Shell Eastern. Besides helping PEC to secure project and maintenance contracts, the close working relationships it has with its customers also helped in its overseas expansion.

Page 8

4 August 2011

PEC Ltd

Exhibit 10: Major customers

Source: Company

Weaknesses Credit and liquidity risks. The group may be exposed to some credit and liquidity risks as it generally offers customers credit terms of 30-45 days. In the event that its customers default, the group may need to write off part of its debts. If its customers delay on payments, the group may be faced with a liquidity squeeze. These risks are mitigated by the fact that (i) the group's main customers are reputable large multinational corporations, and (ii) that it always maintains a sizeable amount of cash reserves. Geographical concentration in Singapore. Despite its overseas expansion over the past several years, PEC's operations are predominantly based in Singapore, where it has a number of fabrication facilities. This makes it highly susceptible to event risk in Singapore. For example, a power outage in Singapore's Jurong Island may cause delays to its project and maintenance work, resulting in cost over-runs.

Page 9

4 August 2011

PEC Ltd

Exhibit 11: Revenue by geographical segments

100% 80% 60% 40% 20% 0% FY06 Singapore FY07 FY08 FY09 FY10

Middle East

Asia Pacific (ex-SG)

Source: Company data, OIR

Opportunities Expansion into related industries. Given PEC's engineering and project management expertise, there may be opportunities to expand into new or related industries such as LNG, power generation or marine construction. However, this move has to be carefully considered because the initial capital outlay could be high. M&A opportunities. PEC's current large cash-pile (S$168m of 31 Mar 11) enables it to seek suitable M&A opportunities for inorganic growth. The group could acquire smaller EPC companies in countries such as UAE or Indonesia to diversify its geographical presence or target complementary businesses to expand its service offerings to its customers. Threats Stiff competition. According to our channel checks, Singapore-based EPC firms are facing competition within Jurong Island, and this has led to increased margin pressure over the past several years. If this trend continues, PEC's profitability may be heavily affected. Rising labour costs may threaten profitability. PEC's operations are labour intensive, and the group relies heavily on skilled foreign workers to keep its operating costs low. As the supply of foreign manpower in Singapore is subject to policies imposed by the Ministry of Manpower, changes in government policy may lead to higher labour costs or manpower constraints.

Page 10

4 August 2011

PEC Ltd

Section D: Financial Highlights and Analysis Gross margins to remain between 20-30%. We expect gross margins of both its projects and maintenance segments to remain within its historical range of 20-30%. Project margin jumped from 20% in FY09 to 28% in FY10, attributable mainly to a one-off settlement for some outstanding project claims. Going forward, we believe that gross margins may moderate due to higher labour costs and stiffer competition.

Exhibit 12: Gross margins by business segments

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FY06 Projects
Source: Company data, OIR

FY07

FY08

FY09

FY10 Overall

Maintenance

Revenue growth may be lumpy. We expect some volatility in PEC's top-line growth as project work, which accounted 73% of total revenue as of FY10, is lumpy in nature. This is because the oil & gas and petrochemical industries are cyclical sectors; a slowdown in these industries may lead to reduced capital expenditures for related infrastructure projects. In addition, revenue and profit recognition may be lumpy as a project progresses through different stages (i.e. from design and engineering to procurement to construction).

Page 11

4 August 2011

PEC Ltd

Exhibit 13: Revenue growth

500 450 400 350 300 250 200 150 100 50 0 FY06
Proj. Rev. Proj Grow th

100% 80%
YoY Growth

Revenue S$m

60% 40% 20% 0% -20% FY07 FY08 FY09 FY10


Overall Rev. Overall Grow th

Maint. Rev. Maint. Grow th

Source: Company data, OIR

Large war-chest of cash. The group currently holds S$168m of cash and cash equivalent, amounting to 56% of total assets as of Mar 2011. The large war-chest, largely due to unutilized IPO proceeds and internally generated capital, provides PEC with the flexibility to make large capital expenditures or look for strategic acquisitions or joint ventures if the opportunity arises.

Exhibit 14: Cash and cash equivalents

SGD (S$m) Revenue Cash and cash equivalents Cash (% of revenue)


Source: Company data, OIR

FY06 149 22 14.9%

FY07 237 36 15.2%

FY08 315 49 15.6%

FY09 440 50 11.4%

FY10 Mar 11 467 161 45.9% 88 168 N.M

No dividend policy. The group does not have a dividend policy as of this point. For FY10, PEC paid a total dividend of S$10.2m, representing a payout ratio of 20.7%.

Page 12

4 August 2011

PEC Ltd

Section E: Valuation and Recommendations Price/Earnings multiple approach. Using a simple average of comparable peers listed in Singapore, the industry average forward PER is 6.4x. The industry's average market cap is S$215m, lower than PEC's market cap of S$244m.

Exhibit 15: Peer comparison

Company Rotary Engineering Hiap Seng Engineering Mun Siong Corporation Simple Average PEC Ltd

Market Cap (S$m) 460 123 64 216 262

Current Price (S$) 0.810 0.405 0.153 N.M 1.025

Forward 12 months EPS (S$) 0.12 0.06 0.03 N.M 0.19 PE(x) 7.0 7.1 5.1 6.4 -

Source: OIR, Bloomberg (as of 3/8/2011) Note EPS for Rotary Engineering are based on OIR's estimates, while that of Hiap Seng Engineering and Mun Siong Corporation are based on Bloomberg's consensus estimates. N.M: Not meaningful

Initiate with BUY. Our fair value estimate for PEC is S$1.23, based on a 6.4x industry-average PER on its forward 12-months EPS. We feel that current valuation is undemanding and the group has substantial cash of S$0.67 per share. Potential price catalyst could from contract wins and/or successful acquisitions.

Page 13

4 August 2011

PEC Ltd

PEC's Key Financial Data EARNINGS FORECAST Year Ended 30 June (S$m) Revenue Gross profit Operating expenses EBIT Other income PBT Tax PAT Minority interest Net profit FY09 440.5 91.4 -64.2 31.1 -0.9 30.2 -5.6 24.5 3.6 21.0 FY10 467.4 123.2 -70.6 56.9 0.3 57.2 -9.0 48.2 3.4 44.8 FY11F 420.6 113.6 -63.5 54.1 -0.6 53.4 -9.1 44.3 4.4 39.9 FY12F 559.4 145.4 -84.5 65.0 -0.6 64.3 -10.9 53.4 5.3 48.1 BALANCE SHEET Year Ended 30 June (S$m) Cash and cash equivalents Other current assets Property, plant, equipment Total assets Debt Current liabilities excluding debt Total liabilities Shareholders equity Total equity Total equity and liabilities FY09 50.4 104.9 56.4 214.2 0.1 94.3 97.9 105.0 116.3 214.2 FY10 160.8 82.5 60.2 309.2 0.1 110.4 115.0 177.6 194.2 309.2 FY11F 170.0 81.8 69.1 326.7 0.1 93.3 97.8 208.9 228.9 326.7 FY12F 199.2 127.7 68.7 401.2 0.1 123.2 127.8 248.9 273.4 401.2

CASH FLOW Year Ended 30 June (S$m) Op profit before working cap. Working cap, taxes and interest Net cash from operations Purchase of PP&E Investing cash flow Financing cash flow Net cash flow incl. forex Cash at beginning of year FD and cash pledged Cash at end of year Source: Company data, OIR estimates FY09 38.3 -5.2 33.2 -21.4 -20.7 -4.2 2.4 50.4 0.0 50.4 FY10 65.2 42.8 108.0 -11.3 -13.9 21.8 110.4 160.8 0.0 160.8 FY11F 63.8 -16.5 47.3 -20.0 -20.0 -9.6 9.2 170.0 0.0 170.0 FY12F 75.2 -15.9 59.3 -11.0 -11.0 -8.9 29.1 199.2 0.0 199.2

KEY RATES & RATIOS


EPS (S cents) NAV per share (S cents) EBIT margin (%) PBT margin (%) Net profit margin (%) PER (x) Price/NAV (x) Dividend yield (%) ROE (%) Net gearing (%)

FY09 NA NA 7.1% 6.9% 4.8% NA NA NA 20.0% Net Cash

FY10 17.9 70.9 12.2% 12.2% 9.6% 5.7 1.4 0.0% 25.2%

FY11F 15.9 83.3 12.9% 12.7% 9.5% 6.4 1.2 3.8% 19.1%

FY12F 19.2 99.3 11.6% 11.5% 8.6% 5.3 1.0 3.5% 19.3%

Net Cash Net Cash Net Cash

Page 14

4 August 2011

PEC Ltd

SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds NIL shares in the above security. RATINGS AND RECOMMENDATIONS: OCBC Investment Researchs (OIR) technical comments and recommendations are short-term and trading oriented. - However, OIRs fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. OIRs Buy = More than 10% upside from the current price; Hold = Trade within +/-10% from the current price; Sell = More than 10% downside from the current price. - For companies with less than S$150m market capitalization, OIRs Buy = More than 30% upside from the current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the current price. DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged/Confidential information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this message that do not relate to the official business of my company shall not be understood as neither given nor endorsed by it.

Co.Reg.no.: 198301152E
For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd Page 15

Carmen Lee Head of Research 4 August 2011