PEC Ltd - Cash rich; initiate with BUY (OCBC)

Initiating Coverage BUY

Current Price: S$1.025

Fair Value: S$1.22

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.