• Largest provider of ready-mixed concrete in Singapore. A recovery in construction demand by as much as 31% in 2021e is expected to boost its revenue for the next two years.
• Barriers to entry include limited silo availability, costly batching plants, vertical integration, efficient delivery system and a major market share.
• Initiate coverage with BUY and target price of S$0.40, based on 8x FY21e EV/EBITDA, its 10-year average (excluding outliers in FY12 and FY17).

Company Background

Listed on the mainboard of the SGX in 1993, Pan-United is the largest provider of ready-mixed concrete (RMC) and cement in Singapore, with a growing footprint in Vietnam, Malaysia and Indonesia. PanU commands about 40% of Singapore’s RMC production industry. It has two main business lines: concrete and cement at 95% of FY20 revenue; and trading and shipping, at 5%. Singapore generated 70% of its FY19 revenue. 

Investment Merits

1. 2021 construction recovery expected. Construction demand in 2020 cascaded 36% YoY to S$21.3bn as the industry was severely disrupted by COVID-19. Singapore’s Building and Construction Authority (BCA) predicts that 2021 construction demand will recover to S$23-28bn. RMC volumes rebounded from almost 100% below their 10-year average at the start of 2020 to 14% below as at December 2020. The recovery was spearheaded by public residential and civil engineering projects. We are expecting PanU to benefit, as it is the market leader with a 40% share in the past 5-6 years.
2. Vertical integration provides supply-chain resilience; barriers to entry include limited silos and costly batching plants. PanU achieves vertical integration through cement silos via United Cement and Raffles Cement, a slag producer at Meridian Maplestar, as well as its aggregate quarry in PT Pacific Granitama. Raw materials are mostly imported from its strategic business partners in Japan. As silo facilities are limited in Singapore and batching plants grow increasingly costly, we believe there are multiple barriers to entry, apart from having dominant players in the market.
3. Sustaining competitive edge through downstream innovations. PanU owns or manages virtually all the components and processes across the RMC value chain, from innovation and the production of RMC to delivery to customers. It is able to deliver large volumes of RMC efficiently, of consistent quality and on time with the help of its business innovations, AiR and goTruck! AiR is a RMC management platform while goTruck is a truck hailing platform for the construction industry. We believe continued innovations and digitalisation will sustain its competitive edge over peers.
4. Potential for AiR’s commercialisation. In December 2019, South Korea’s largest RMC company, Eugene Corporation (023410 KS, Not Rated), signed an MOU with PanU to assess PanU’s AiR platform for the potential digitalisation of its own end-to-end operations. The platform uses AI, data analytics, algorithms and sensor technologies to optimise vertical operations along the entire value chain. We are looking at a timeline of one year for Eugene to reach a decision on adoption. PanU is also in talks with other regional players for AiR’s prospective commercialisation. In the longer term, we believe AiR has the potential to gain traction in the RMC industry, which is currently technologically disconnected.

We initiate coverage with a BUY rating. Our target price of S$0.40 is based on PanU’s historical 10-year average of 7.8x FY21e EV/EBITDA, excluding outliers in FY12 and FY17. PanU is trading at -1SD of its 10-year mean of 8.26x. Our TP implies a total potential return of 38.6%, inclusive of dividend yields of 3.0%.