Maintain BUY
Previous Rating: BUY
Current Price: S$0.805
Fair Value: S$1.12
5-year maintenance contract. PEC announced recently that it has secured a tankage maintenance and repair services contract in Singapore. The contract is effective for five years beginning Sep 2011 and involves ExxonMobil's Jurong Refinery, Pulau Ayer Chawan Refinery and Singapore Chemical Plant. Although the unit rates for the different type of maintenance work have been agreed upon, the actual timing, amount and scope of the work to be carried out will depend on ExxonMobil's schedule which is not disclosed. For FY12, we estimate low single-digit increments to its maintenance revenue (over FY11). In terms of margin pressure, we see no signs of easing. We believe that the stiff competition within Singapore's Jurong Island will persist and may even intensify. Recall that PEC's gross margin for maintenance declined to 17.8% in FY11 from 23.4% a year ago. Looking ahead, we estimate gross margins of around 17.0% for the maintenance segment.
Expansion outside oil & gas sector. The company also announced plans to provide engineering, procurement and construction (EPC) services to infrastructure, township, industrial, energy and power-related facilities, through its newly incorporated subsidiary Enerz Engineering Ltd (Enerz). Enerz will have an initial paid up capital of S$360k funded from PEC (97%) and minority shareholders Lim Tow Hong and Chong Pang Soon (3%). PEC's investment in Enerz (S$350k) will be funded from internal sources. We welcome the move by PEC to deploy its huge capital, which we believed to be underutilized. However, we also note that Enerz is not within the group's area of expertise (oil & gas sector) and it may need to scale the learning curve before it can make meaningful contribution to the group's top- and bottom-line. In any case, the Enerz is only at the initial stage of its development and it remains too early to tell if the subsidiary's business will take off.
Idle cash? As at end-FY11, the group had S$158m of net cash against S$210m of equity (end-FY10: S$160m net cash vs. S$194m equity). Investors may be concerned about the group's acquisition strategy as the group has been holding on to large amount of cash over the past two years. Given its balance sheet strength, we believe that PEC can well afford acquisition with size north of S$100m. This may provide a catalyst to the group's share price. Meanwhile, we raised our FY12 maintenance revenue by 5% for the recent contract win, but our FY12 EPS remains unchanged after rounding. As such, we keep our BUY rating and fair value estimate of S$1.12.
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