• 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. YTD22 contracts awarded is down 9.4% YoY.
• According to data from the Building and Construction Authority (BCA), demand for ready-mixed concrete (RMC) for the first nine months of 2022 was ~8.8mn cu/m, about 8% lower than our estimate and up 14.2% YoY.
• Maintain BUY with unchanged target price of S$0.54. We trim FY22e/FY23e earnings by 12%/11% respectively on account of the Heightened Safety period imposed. Our TP 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.

According to data from the BCA, demand for RMC for the first nine months of 2022 was ~8.8mn cu/m, about 8% lower than our estimate but higher than ~8.5mn cu/m in the same period last year (Figure 1). 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 PanU as it has moved to half-yearly reporting.

The Positives

+ Construction progress payments for first 9 months of 2022 rose 14.2% YoY. 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

- Workplace fatalities 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 awarded for 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.

• 1H22 revenue in line with our expectations, at 51%. Profit however, came in lower at 34% as result of higher staff and materials costs.
• Net profit grew 83% YoY driven by higher ASP of ready-mixed concrete (RMC) +18% YoY, higher GPM +1.4% and a higher share of results from associates of $3.6mn.
• Workplace fatalities and dengue hampered recovery. Volumes declined 10-15% as a result of the spate of stop-work orders issued by the authorities to construction sites.
• Maintain BUY with lower target price of S$0.54, from S$0.68. We trim FY22e/FY23e earnings by 26%/11% respectively on account of higher staff, utilities and materials costs. Our TP is based on 12x FY22e P/E, a 20% discount to its 10-year historical average P/E on account of the still uncertain business environment.

The Positives

+ 1H22 net profit grew 83% YoY, driven by construction recovery and better GPM. We estimate that higher demand +5% (Figure 1) and ASP of RMC +18% higher YoY (Figure 3) drove revenue growth of 22% YoY for 1H22. The Group also saw better GPM during the period as it successfully passed on cost increases to its customers. Overall, the construction sector continued to see a healthy recovery in the 1H22 (Figure 2) in part due to the relaxation of border restrictions on the inflow of migrant workers.

+ Higher contributions from associates of $3.6mn +168% YoY lift profits. The uplift in contribution was from the sale of coal from PT Lanna Harita Indonesia, which benefitted from higher coal prices during the period. Coal prices in 1H22 averaged US$300 and are up 182% YTD.

The Negative

- Workplace fatalities and dengue hampered recovery. In the first six months of 2022, the Ministry of Manpower (MOM) reported 28 workplace fatalities, many of which were in the construction industry. This led to a call for companies to conduct a safety time-out on 9 May 2022. In addition, in 1H22, more than 12,000 cases of dengue cases were reported, far exceeding the 5,258 cases logged in the whole of 2021. This resulted in a spate of stop-work orders issued by the authorities to construction sites, which impeded construction progress. Management guided that the volume decrease as a result of such stop-work orders adversely impacted volumes by 10-15%.

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, it 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, the Group 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.

Outlook

Construction sector sees faster pace of recovery in 1H22; tailwinds remain 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 PanU as a key beneficiary of the construction sector recovery. PanU’s batching plants still have capacity to take on a 10-15% increase in RMC demand in Singapore.

Maintain BUY with a lower TP of $0.54, from $0.68. We trim FY22e/FY23e earnings by 26%/11% respectively on account of higher staff, utilities and materials costs. Our TP is reduced to $0.54 from S$0.68 based on 12x FY22e P/E, 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.

•  2H21 revenue and profit beat expectations, at 60.7% and 76.2% of FY21e estimates respectively. The beat was driven by higher sales from its concrete and cement business which recovered faster on the back of the faster pace of recovery in the construction sector.
• Net gearing was 22% lower than our forecasts; FY21 DPS 0.6 cents higher than our expectations. Full-year 2021 dividend at 1.6 cents, represented a 60% payout, signalling confidence in the near- and mid- term outlook.
• Manpower shortages, supply-chain disruptions and volatile freight costs continue to hamper growth recovery. We tweaked our GP margin expectations lower for FY22e/FY23e in anticipation of higher raw materials cost and supply-chain disruptions.
• Maintain BUY with higher target price of S$0.46, from S$0.44. We raise FY22e earnings by 11% on account of the higher demand for ready-mixed concrete brought about by the construction recovery. Our TP is based on 16x FY22e P/E, a 15% discount to its 10-year historical average P/E on account of the still uncertain environment.

The Positives

+ 2H21 revenue and profit above, driven by recovery in concrete and cement segment; higher associate contributions. Group revenue increased 45% YoY in 2H21, growing at the same pace as 1H21 as the recovery of construction activities in Singapore continued to drive growth. According to the Building and Construction Authority (BCA), ready-mixed concrete (RMC) demand rose 52.7% in 2H21 and 59.4% for full-year 2021. RMC sales volumes rose, and is now at pre-COVID levels (Figure 2). Contributions from its associate, PT. Lanna Harita Indonesia in which it owns a 10% stake, also rose on the back of higher coal prices.

+ Net gearing 22% lower than our forecasts; FY21 DPS 0.6 cents higher than our expectations. Backed by net operating cashflows of S$33mn in 2H21, PanU repaid S$17.7mn in loans to lower its overall net gearing from 0.14x to a net cash position of $17mn. Interest expenses accordingly dropped by 38% YoY. It also declared a final DPS of 1.1 SG cents for FY21, bringing full-year 2021 dividend to 1.6 SG cents, representing a payout of 60%, above its dividend policy to distribute at least 30% of its annual PATMI. This, in our view, signals the Group’s confidence in its near- and mid- term outlook.

The Negative

- Manpower shortages, supply-chain disruptions and volatile freight costs. GP margin was slightly weaker YoY as raw materials price rose at a faster pace than average selling price. Dec-21 ASPs are 9% higher YoY at S$104/cu m and 7% higher vs. the same period in 2019. Given the strong demand for construction materials in the region, we do not think prices would moderate in the near-term. PanU also faced disruptions in raw-material supplies and had to search for alternatives. Supplies from new sources require lead times of a month for BCA testing before they can be imported. This hampered its ability to fulfil contracts. We tweaked our GP margin expectations lower for FY22e/FY23e in anticipation of higher raw materials cost from supply-chain disruptions.

Outlook

BCA upgrades forecasts of construction demand for 2022. The BCA has upgraded its forecasts of construction demand for 2022 to $27bn-32bn per year from the original $25bn-32bn per year, comparable with the preliminary $30bn in 2021. The BCA also projects that demand for building materials will increase in tandem with the increased construction demand. Steel rebar demand is forecasted to grow to 1mn-1.2mn tonnes in 2022, representing ~22% YoY increase.

We note that BCA’s forecasts for average construction demand in 2022-2025 excludes the development of Changi Airport Terminal 5 and expansion of the two integrated resorts. As our forecasts have not included these projects, there is upside if they go live.

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 PanU as a key beneficiary of the construction sector recovery. PanU’s batching plants still have capacity to take on a 10-15% increase in RMC demand in Singapore.

Maintain BUY with a higher TP of $0.46, from $0.44. We raise FY22e earnings by 11% on account of the higher demand for RMC brought about by the construction recovery. Our TP is raised to $0.46 from S$0.44 based on 16x FY22e P/E, a 15% discount to its 10-year historical P/E on account of the still uncertain environment. Stock catalysts are expected from higher contract volumes and better margins.