pec ltd. - phillipcapital
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Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 006/10/2019 Ref. No.: SG2021_0033
PEC LTD.
Cash-rich SINGAPORE | INDUSTRIALS | NON-RATED
1. PEC is the largest single-source plant and terminal maintenance service provider in Singapore.
2. Project Work (PW) orderbook grew at a 5-year CAGR of 3.4% to S$191mn in FY20. Topline anchored by S$200mn worth of recurring maintenance service (MS) revenue.
3. Net cash is 76% of PEC’s market cap. Company Background A local player since 1982, PEC is a plant and terminal engineering specialist with a footprint in nine countries. It is the largest single-source maintenance service provider in Singapore. Through its core businesses, PW (55% of FY20 revenue) and MS (44%), PEC caters to downstream customers in four main sectors: oil & gas, petrochemical, oil & chemical terminals and pharmaceutical in Southeast Asia and the Middle East.
Highlights 1. Excluding impairments, PEC would have been profitable in FY20. 4Q20 performance was
affected by lockdowns and closed borders, which restricted global trade and travel flows. Despite this, revenue grew 26% YoY in FY20. Excluding net impairment of financial assets of S$16.4mn inclusive of a S$10.7mn provision for long outstanding receivables in FY20, PEC would have been profitable due to higher PW revenue.
2. PW orderbook grew at a 5-year CAGR of 3.4% to S$191mn in FY20. PEC’s ability to sustain orderbook growth is attributable to its loyal customer base, cutting-edge equipment and systems and recognition as a reliable integrated engineering solutions provider.
3. S$200mn worth of recurring MS revenue. A typical PW project takes 1-2 years to complete.
MS contracts last 3-5 years. MS revenue grew at a 5-year CAGR of 8.3% in FY15-FY19, to contribute 44% to FY20 group topline. As PW sales are lumpy, the growth in recurring MS income is expected to provide greater income visibility.
4. Net cash is 76% of market cap. Balance sheet remains healthy with net cash of S$81mn in FY20, close to 76% of its market cap. Net cash to equity is 37% and gross gearing is minimal at 8.9%. With strong cash generation and a robust balance sheet, expect consistency in dividend payments and potential share buybacks.
5. Leveraging Singapore’s strength as top 10 petrochemical hub. Singapore is the world's
fifth-largest refinery export hub. It ranks among the top 10 globally by chemical export volume. Despite Covid-19, its chemical cluster attracted the second-largest amount of commitments in fixed asset investments in Singapore in 2020. Singapore will continue to work towards creating 1,400 new jobs and manufacturing value added (MVA) of S$12.7bn in its energy and chemical industry by 2025 through an Energy & Chemicals Industry Transformation Map (ITM).
The report is produced by Phillip Securities Research under the ‘Research Talent Development Grant Scheme’ (administered by SGX).
24 February 2020
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Revenue
PEC offers services* at every stage of the plant and terminal construction and maintenance value chain. PW and MS are its core businesses. Singapore is PEC’s largest market in both businesses, at 39% of PW revenue and 58% of MS revenue in FY20.
1. PW. Project-based. Comprises engineering, procurement & construction (EPC), EPC project management, engineering and project management consultancy services.
2. MS. Recurring. Comprises plant turnaround and upgrading, maintenance of plant equipment and single-source maintenance services for production plants.
Figure 1: Plant and terminal construction and maintenance value chain
*PEC’s services cover engineering, mechanical, piping, structural, tankage, electrical & instrumentation, heat
treatment, testing & isolation, painting & blasting, scaffolding, insulation & refractories, fireproofing and
hydro jetting; Source: PEC
Figure 2: PEC's geographical presence
Source: Company
A typical PW project takes 1-2 years to complete while MS contracts last 3-5 years.
Figure 3: MS grew at a 5-year CAGR of 8.3% to contribute significantly to PEC’s income. PW and MS revenue at 55% and 44% of FY20 topline respectively. [S$mn]
Source: PSR, Company
Figure 4: Operations in Singapore and UAE make up 47% and 21% of PEC’s FY20 revenue. [S$mn]
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United Arab Emirates
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Highlights 1. Excluding impairments, PEC would have been profitable in FY20. 4Q20 performance was
affected by lockdowns and closed borders, which restricted global trade and travel flows. Despite this, revenue grew 26% YoY in FY20. Excluding net impairment of financial assets of S$16.4mn inclusive of a S$10.7mn provision for long outstanding receivables in FY20, PEC would have been profitable due to higher PW revenue.
2. PW orderbook grew at a 5-year CAGR of 3.4% to S$191mn in FY20. PEC’s ability to sustain orderbook growth could be attributed to:
a. A loyal customer base and experienced management team. PEC’s customers include major MNCs in the oil & gas, petrochemical, pharmaceutical and oil & chemical terminal industries. Many have relationships of 20-30 years with PEC. Most of PEC’s senior executives have been with the group for more than 15 years, providing decades of experience in their individual fields.
b. Extensive track record (Appendix I) and recognition as one-stop shop for both PW and MS services. Over the past two decades, PEC has built a strong reputation as a reliable integrated engineering solutions provider. PEC can cross-deploy equipment to various operational sites and respond to emergencies or un-planned plant shutdowns. As a result of its reliability and flexibility, it is able to secure bigger projects. In addition, PEC is recognised for its excellent safety standards and best practices, with its various health, safety, security and environmental certifications (e.g. ISO-9001) and awards.
c. State-of-the art facilities, equipment and information systems. PEC has its own
fabrication facilities in the countries it operates in, providing support to all PW and MS contracts. In Singapore alone, PEC has an 86,000 sqm fabrication facility where it owns 2,000 pieces of construction equipment. This assures customers that it has the necessary resources to support project implementation without delays. PEC has also developed its own cutting-edge resource and project management solutions that enhance the effectiveness, safety and efficiency of plant maintenance work. Ongoing digitalisation and deep engineering capabilities are expected to position PEC well for rising opportunities in existing and adjacent market segments.
3. S$200mn worth of recurring MS revenue. PEC holds a 65% share of Singapore’s MS market.
From 2015 to 2019, MS revenue grew at a CAGR of 8.3% to become a stable contributor to PEC’s topline, at 44% in FY20. As PW sales are lumpy, the growth in recurring income is expected to provide greater income visibility.
4. Net cash is about 76% of market cap. PEC’s balance sheet remains healthy with net cash of
S$81mn in FY20. This is close to 76% of its market cap. Net cash to equity is 37% and gross gearing is minimal at 8.9%. With strong cash generation and a robust balance sheet, consistency in dividend payments and potential share buybacks are expected.
5. Next stage of growth: expansion in Asia and Middle East. In line with its expansion strategy,
PEC secured two new operating maintenance sites in China and completed the purchase of a remaining 40% equity interest in Huizhou Tianxin Petrochemical Engineering Co. Ltd for RMB37.5mn or S$7.4mn in FY20. The latter provides project works and maintenance services to China’s energy & petrochemical sectors.
6. FY20 dividend yield of 1.23%. PEC maintained dividend yields of 3-4% in FY17-FY19. In light
of its need to conserve cash during the pandemic, it has proposed a final tax-exempt, one-tier DPS of 0.5 Singapore cent for FY20, bringing FY20 dividend yield to 1.23%.
Figure 5: MS revenue grew at a 5-year CAGR of 8.3%
Source: PSR, Company
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Singapore: a top-10 petrochemical hub Today, Singapore is the world's fifth-largest refinery export hub and ranks among the top 10 globally by chemical export volume. Listed among the globe’s top 10 petrochemical hubs, Jurong Island is the crowning glory and nucleus of Singapore’s petrochemical industry. Its integrated ecosystem, featuring utilities and logistics service providers, creates production synergies that allow companies to save costs. To date, Jurong Island has attracted over S$50bn of investments and is home to more than 95 companies from the US, Europe and Asia. The list includes heavyweights such as BASF, Dupont, ExxonMobil and Shell. Due to Covid-19, Singapore’s chemical-cluster output dipped 1% YoY in 2020. Chemical fixed asset investments fell 18.9% YoY to S$4.11bn. Still, the cluster attracted the second-largest amount of commitments for fixed asset investments in Singapore. In Dec 2020, cluster output grew 12.3% YoY, with all segments growing except petroleum. The petrochemical and specialty segments grew 17.9% and 16.9% respectively from a year ago, when production was low due in part to plant maintenance shutdowns.
Figure 6: Fixed asset investments in Singapore (2011-2020)
Source: Economic Development Board
Figure 7: Commitments for chemicals formed 24% of fixed asset investments in 2020
Source: Economic Development Board
Figure 8: Singapore’s petchem export growth
Source: ICIS, Enterprise Singapore
Significant commitments secured in 2020 included projects such as ExxonMobil's expansion of its refining and petrochemical complex on Jurong Island. Also, Afton Chemical Corporation, a global leader in the lubricant and fuel additive market, has invested S$400mn in the Singapore Chemical Additive Manufacturing Facility to add GPA blending capabilities. Output from the chemical cluster is expected to increase in the next three months. Within the cluster, petroleum is expected to produce more after emerging from plant maintenance shutdowns a quarter ago. The specialty segment is also forecast to produce more mineral oil additives to meet increased export demand. Singapore is working towards creating 1,400 new jobs and MVA of S$12.7bn for its energy and chemical industry through its ITM. It will continue to emphasise transforming the existing base of chemical manufacturing through the adoption of innovative solutions and venturing into new markets. Its energy and chemical ITM aims to construct and/or expand 20 new application development centres by 2025, with US$55mn allocated for R&D. The national plan aims to have more chemical plants adopt advanced manufacturing technologies in areas such as refining petrochemicals and specialty chemical activities.
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Outlook Southeast Asia is home to some of the fastest-growing economies. Its total population is expected to grow by as much as 13% by 2030, with the region's GDP more than doubling in the same period. This implies that irrespective of the shift towards sustainability and non-fossil-fuel-based transport, demand for refined oil and gas and their products is expected to rise sharply in the region. Also, the Covid-19 pandemic and pivot to renewables have triggered an exodus of the world's largest oil and gas companies from Southeast Asia. This raises the possibility of supply shortages once demand recovers.
With the worst of the pandemic behind, S&P Global Platts Analytics has raised its 2021 oil demand growth outlook by half a million barrels per day to 6.3mn b/d, with China and India in Asia leading the way. Oil demand in 2021 is now expected to come in at 99.53mn b/d. Asian oil demand is expected to grow by 1.7mn b/d in 2021. This will match or slightly top 2019 levels. China and India will account for around 70% of the growth. Supply and demand for PW EPC orders depend on several factors. Major ones are declining operating costs of oil & gas fields, expansion in the downstream sector and increasing demand for LNG infrastructure. Increase in oil & gas transportation is expected to reduce investments in the development of pipeline infrastructure, which will limit EPC growth. However, expansion in downstream infrastructure in the Asia Pacific is expected to boost demand for EPC as China and India plan to add large refining capacity in the years to come. The market for oil & gas EPC is forecast to grow at a CAGR of more than 5.35% between 2020 and 2025, by Mordor Intelligence.
Figure 9: Change in refining distillation capacity (thousand barrels daily)
Source: PSR, CEIC
Risks 1. Closing refineries could affect PW orderbook and MS contracts. Amid Covid-19, demand
for refined products is down at least 20%, according to McKinsey. This reflects industrial slowdowns and travel restrictions. The pandemic has accelerated a wave of refinery closures, with several regional refiners forced to close or review their operations due to poor refining margins. This may translate into fewer PW orders and MS contracts.
2. Increased competition. Competitors could ramp up their efforts to mimic PEC’s success and
win over PEC’s clientele and erode its margins. That said, switching entails a long design and development process and the cost is likely to outweigh the benefits. PEC’s competitors include Rotary Engineering, Jurong Engineering and Hiap Seng Engineering.
3. Execution risks. Contracts are generally priced at a margin over costs. As PEC responds to emergencies or unplanned plant shutdowns, unforeseen circumstances can result in cost overruns.
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Appendix I: PEC’s track record
Figure 10: Project Work (Description, Location, Sector)
Figure 11: Plant maintenance (Description, Location, Sector)
Figure 12: Plant turnaround (Description, Location, Sector)
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Figure 13: Engineering (Description, Location, Sector)
Figure 14: Oil and chemical terminal (Description, Location, Sector)
Source: PEC
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Financials
Income Statement Balance SheetY/E June, (S$’000) FY16 FY17 FY18 FY19 FY20 Y/E June, (S$’000) FY16 FY17 FY18 FY19 FY20
Revenue 575,078 418,579 330,806 392,724 495,067 ASSETS
Cost of sales (468,942) (334,698) (246,381) (305,729) (410,629) PPE 94,052 83,723 77,691 84,637 91,698
Gross profit 106,136 83,881 84,425 86,995 84,439 Investment properties 7,640 7,372 6,911 5,943 5,782
Administrative expenses (30,566) (27,852) (28,124) (27,677) (28,551) Right of use assets - - - - 21,489
Finance expenses (1,050) (619) (398) (587) (1,181) Other items - 10,744 10,873 11,569 7,951
Share of results of associate 410 587 311 159 635 Total non-current assets 101,692 101,839 95,475 102,149 126,920
Other items - (40,709) (42,799) (45,960) (63,333) Accrued income 20,173 38,949 46,762 59,598 -
Profit before Tax 74,930 15,288 13,415 12,930 (7,991) Trade receivables - 111,633 92,725 111,192 141,080
Income tax expense (5,694) (1,406) (2,649) (3,123) (5,203) Cash and short-term deposits 150,563 107,022 86,795 94,245 100,069
Profit after Tax 69,236 13,882 10,766 9,807 (13,194) Capitalised contract costs - - - 35,840 20,496
EBIT 75,980 15,907 13,813 13,517 (6,810) Others - 16,508 24,478 33,013 47,622
EBITDA 91,915 31,034 26,759 25,696 24,456 Total current assets 170,736 274,112 250,760 333,888 309,267
Total Assets 272,428 375,951 346,235 436,037 436,187
LIABILITIES
Per unit data Trade payables 31,139 27,011 17,668 27,439 26,294
Y/E June FY16 FY17 FY18 FY19 FY20 Contract liabilities 45,169 38,851 1,305 57,797 66,640
NAVPS (S$) 0.87 0.72 0.71 0.69 0.71 Others - 65,726 77,709 99,880 99,991
EPS (S$) 0.07 0.06 0.04 0.03 (0.18) Total current liabilities 76,308 131,588 96,682 185,116 192,925
DPS (S$) 0.03 0.03 0.02 0.02 0.01 Lease liabilities - - - - 18,994
Others - 10,504 9,480 8,533 7,926
Total non-current liabilities - 10,504 9,480 8,533 26,920
Total liabilities 76,308 142,092 106,162 193,649 219,845
Cash Flow Net assets 196,120 233,859 240,073 242,388 216,342
Y/E June, (S$’000) FY16 FY17 FY18 FY19 FY20 Represented by:
CFO Share Capital 58,481 58,481 58,836 58,836 58,836
Profit before tax 27,975 15,288 13,415 12,926 (40,291) Retained earnings 163,420 170,021 174,077 174,012 156,153
Adjustments 11,691 11,966 16,030 8,330 83,224 Others - 5,357 7,160 8,119 1,353
WC changes 20,090 (49,133) (34,000) 3,047 (2,545) Total equity 221,901 233,859 240,073 240,967 216,342
Cash generated from ops 59,756 (21,879) (4,555) 24,303 40,388
Others (3,401) (3,840) (2,510) (2,031) (4,041) Valuation Ratios
Cashflow from ops 56,355 (25,719) (7,065) 22,272 36,347 Y/E June FY16 FY17 FY18 FY19 FY20
P/NAV (x) 0.63 0.89 0.80 0.86 0.57
CFI P/E (x) 7 10 15 19 -2
Purchase of PPE (11,785) (4,880) (6,907) (19,475) (18,087) EV/EBITDA (x) 12 43 51 58 44
Proceeds from disposal from PPE 5,869 179 263 397 946 Dividend yield (%) 5.5% 3.9% 3.5% 3.3% 1.2%
Others 7,614 (30) 635 1,256 302 Growth & Margins (%)
Cashflow from investments 1,698 (4,731) (6,009) (17,822) (16,839) Growth
Revenue 15.1% -27.2% -21.0% 18.7% 26.1%
CFF Gross profit 14.1% -21.0% 0.6% 3.0% -2.9%
Net cash outflow on NCI acquisition (1,406) - - - (7,415) EBITDA 918.7% -66.2% -13.8% -4.0% -4.8%
Proceeds from borrowings 22 - 289 10,600 2,407 EBIT nm -79.1% -13.2% -2.1% nm
Dividends paid on ordinary shares (2,543) (7,594) (6,365) (5,094) (5,099) Margins
Others (13,526) (7,387) (1,484) (2,130) (4,517) Gross profit margin 18.5% 20.0% 25.5% 22.2% 17.1%
Cashflow from financing (17,453) (14,981) (7,560) 3,376 (14,624) EBITDA margin 16.0% 7.4% 8.1% 6.5% 4.9%
EBIT margin 13.2% 3.8% 4.2% 3.4% -1.4%
Net change in cash 40,600 (45,431) (20,634) 7,826 4,884 Key Ratios
Cash at the start of the period 113,005 150,563 107,022 86,733 93,370 ROE 31.2% 5.9% 4.5% 4.1% -6.1%
Currency translation (3,042) 1,890 345 (1,194) 1,815 ROA 25.4% 3.7% 3.1% 2.2% -3.0%
Ending cash 150,563 107,022 86,733 93,365 100,069 Gearing 8.3% 4.2% 3.7% 8.2% 8.9%
*nm - not meaningful
Page | 9 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
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Total Returns Recommendation Rating
> +20% Buy 1
+5% to +20% Accumulate 2
-5% to +5% Neutral 3
-5% to -20% Reduce 4
< -20% Sell 5
Ratings History
PSR Rating System
Remarks
We do not base our recommendations entirely on the above quantitative return bands.
We consider qualitative factors like (but not limited to) a stock's risk reward profile,
market sentiment, recent rate of share price appreciation, presence or absence of stock
price catalysts, and speculative undertones surrounding the stock, before making our final
recommendation
1 2 3 4 5
0.30
0.40
0.50
0.60
0.70
Au
g-…
No
v-…
Feb-19
May-…
Au
g-…
No
v-…
Feb-20
May-…
Au
g-…
No
v-…
Feb-21
May-…
Au
g-…
No
v-…
Feb-22
May-…
Au
g-…
No
v-…
Source: Bloomberg, PSRMarket PriceTarget Price
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