PEC-110804-OIR

8/6/2019 PEC-110804-OIR

1/15

Please refer to the important disclosures at the back of this document.

PEC Ltd

SINGAPORE Company Update Results MITA No. 010/06/2009

4 August 2011

Initiating Coverage

BUY

Current Price: S$1.025Fair Value: S$1.22

SINGAPORE Company Report MITA No. 022/06/2011

Reuters Code PECL.SI

ISIN Code IX2

Bloomberg Code PEC SP

Issued Capital (m) 260

Mkt Cap (S$m / US$m) 260 / 217

Major Shareholders

Tian San 33.6%

Free Float (%) 33.7%

Daily Vol 3-mth (000) 769

52 Wk Range 0.811 - 1.380

Cash rich; initiate with BUY

Specialist engineering service provider. PEC Ltd (PEC)provides engineering, project management and maintenanceservices to the oil & gas, petrochemical and pharmaceuticalindustries through its two main operating segments: (i) projectworks (FY10: 73% of total revenue) and (ii) maintenanceservices (FY10: 27%). It is led by Executive Chairman MsEdna Ko, Group CEO Mr Robert Dompeling and Managing

Director Mr Wong Peng, each having more than 20 years ofexperience in the oil & gas, and/or oil and chemical industries.

Established track record. PEC's established track recordhelps the group to secure orders, and it has successfullyexecuted a number of projects in Singapore, UAE and China.Its core competences are in the fabrication and installation ofpiping structures and engineering, procurement andconstruction (EPC) services for plants/terminals. Its majorcustomers include multinational engineering firms and majoroil companies, such as Chiyoda Corporation, ExxonMobil andShell Eastern.

Credit and liquidity risks. The group may be exposed tosome credit and liquidity risks as it generally offers customerscredit terms of 30-45 days. In the event that its customerdefaults, the group may need to write off part of its debts. Ifthe customer delays on its payments, the company may befaced with a liquidity squeeze.

Geographical concentration in Singapore. PEC'soperations are predominantly in Singapore, which accountedfor 83% of its total revenue as of FY10. This makes it highlysusceptible to event risk in Singapore. If competition withinSingapore's Jurong Island persists or intensifies, the group'sprofitability may be heavily affected. Changes in Singapore'sforeign labour policy may also lead in higher labour costs or

manpower constraints.

Large war-chest of cash. The group currently holds S$168mof cash and cash equivalent, amounting to 56% of total assetsas of Mar 11. The large war-chest, largely due to unutilizedIPO proceeds and internally generated capital, provides PECwith the flexibility to make large capital expenditures or lookfor 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-monthsEPS. We feel that current valuation is undemanding and thegroup has substantial cash (S$0.67 cash per share). Potential

price catalyst could come from contract wins and/or successfulacquisitions.

1000

1500

20002500

3000

3500

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

0.2

0.4

0.6

0.8

1.0

1.2

1.4

PEC

STI

Chia Jiun Yang

(65) 6531 9809e-mail: [email protected]

(S$ m) FY09 FY10 FY11F FY12F

Revenue 440.5 467.4 420.6 559.4Gross profit 91.4 123.2 113.6 145.4

EPS (cts) NA 17.9 15.9 19.2

PER (x) NA 5.7 6.4 5.3

P/NAV (x) NA 1.4 1.2 1.0

8/6/2019 PEC-110804-OIR

2/15

P age 2 4 Augus t 2 0 1 1

PEC L td

Table of Contents

Page

Section A Company Background 3

Section B Industry Outlook 5

Section C SWOT Analysis 7

Section D Financial Highlights and Analysis 11

Section E Valuation and Recommendations 13

Section F Disclaimer 15

8/6/2019 PEC-110804-OIR

3/15

P age 3 4 Au gus t 2 0 1 1

PEC L td

Section A: Company Background

Specialist engineering service provider. PEC was established in 1982to provide maintenance services to a petroleum refinery in Singapore. Today,

the group provides engineering, project management and maintenance

services to the oil & gas, petrochemical and pharmaceutical industries. It

has two main operating segments: (i) project works (FY10: 73% of total

revenue) and (ii) maintenance services (FY10: 27%). Project works refer to

engineering, procurement, and construction services for part of a plant or

terminal. Maintenance services include tankage, static, rotating, and

electrical equipment maintenance.

Exhibit 1: Revenue by business segments for FY10

Projects

73%

Maint.

27%

Source: Company data, OIR

Exhibit 2: Revenue by business segments

50%61% 64%

76% 73%

50% 39% 36%

24% 27%

0%

10%

20%

30%

40%

50%

60%

70%80%

90%

100%

FY 06 FY 07 FY 08 FY09 FY 10

Projects Maint.


8/6/2019 PEC-110804-OIR

4/15


PEC L td

Experienced management team and Board of Directors. The group 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 ofexperience in the oil and gas and/or oil and chemical terminal industries.

The management team reports to the Board of Directors. Besides Edna

Ko, Robert Dompeling and Wong Peng, the Board also consists of three

other independent directors.

Exhibit 3: Management Reporting Structure

Source: Company, OIR

Exhibit 4: Board of Directors and Key Management Staff

Board of Directors and Key Management Staff

Name Position Notes

Edna Ko Poh Thim Executive Chairman Responsible for overall strategy of PEC. Has been with PEC for over 20 years.

Robert Dompeling Group CEO Responsible for the operational, commercial and financial management, as well as

business development and expansion. Previously held various appointment in

Royal Dutch Shell and Royal Vopak. Spouse of Edna Ko Poh Thim.

Wong Peng Managing Director Responsible for day-to-day operations. Has been with the Group for more than 25years.

Dr Foo Fatt Kah Lead Independent

Director

Founder and CEO of Maida Vale Consulting Group, a specialist investment and

consulting firm.

Chia Kim Huat Independent Director Partner at Rajah & Tann LLP and heads its China Practice Group, with more than

15 years of experience as a practising lawyer.

Ho Yew Mun Independent Director Executive Director at Ho Yew Mun Pte Ltd, a company providing business advisory

business. Previously a managing director of DBS Group.


8/6/2019 PEC-110804-OIR

5/15

P age 5 4 Au gus t 2 0 1 1

PEC L td

Section B: Industry Outlook

Strong oil demand from China. After overtaking North America in oilconsumption in 2007, Asia-Pacific now accounts for 31.2% of global

consumption (as of 2010), compared to the former's 26.8% share. The

main oil consumers are the US, China, Japan and India. Although China

ranks behind US in terms of total oil consumption, its per capita consumption

is only about a tenth that of the US (each person in China uses an estimated

2.5bbl of oil per year, in contrast to estimated 22.3bbl for the US). Hence,

we believe that there is a huge potential for oil demand growth in China.

Exhibit 5: Asia Pacific has been the top consumer of oil since 2007

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

'000

bbl/day

Total Asia Pacific

Total Africa

Total Middle East

Total Europe & Eurasia

Total S. & Cent. America

Total North America

As ia Pac surpassed

N. A merica in terms

of cons umption for

the 1st time in 2007

Asia Pac: 31.2%

of global

cons umption in

2010

N. America:

26.8% of global

consumption in

2010

Source: BP 2011 Statistical Review of World Energy, OIR

8/6/2019 PEC-110804-OIR

6/15


PEC L td

Exhibit 6: Consumption growth trends of the world's top oil consumers

-20%

-10%

0%

10%

20%

30%

40%

50%

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

China

India

US

Japan

Source: BP 2011 Statistical Review of World Energy, OIR

Oil price volatility to remain. World production of oil has not been keeping

up with the demand growth over the past several years, resulting in increased

sensitivity of oil prices to supply dislocations. Compounding the problem is

the increasing influence of speculators. This has led to higher oil price

volatility. Unless there is a substantial easing in the demand-supply situation,

we believe that volatility in oil prices would remain in the foreseeable future.

How will capital expenditure be affected? Oil price volatility may

discourage investments in the oil & gas sector, given the large upfront costs

and considerably long payback periods required for infrastructure projects.

However, if the economic recovery in the developed countries continues to

gain traction and China's growth remains on track, we believe that oil prices

should remain above US$75/bbl. This should sustain most capital

expenditure in the oil and gas sector. If oil companies continue to invest in

capacity building at major petrochemical hubs such as Singapore's Jurong

Island, downstream EPC companies such as Rotary Engineering and PEC

would benefit as some parts of the projects would inevitably flow down to

this segment.

8/6/2019 PEC-110804-OIR

7/15

P age 7 4 Au gus t 2 0 1 1

PEC L td

Section C: SWOT Analysis

Strengths Weaknesses

1. Experienced management team 1. Geographical concentration

2. Established Track Record 2. Credit and Liquidity Risk

3. Close relationship with customers

Opportunities Threats

1. Expansion into related Industries 1. Stiff competition

2. M&A Opportunities 2. Labour constraints

Exhibit 7: SWOT Table

Source: OIR

Strengths

Experienced management team. We believe that a strong management

team is one of PEC's key strengths. As discussed in Section A, its executive

directors are experienced in the oil & gas and petrochemical industries.

The group has performed well over the past several years, achieving average

return-on-asset and return-on-equity rates of 14.4% and 25.2%, respectively,for FY06-FY10. In our view, the group should continue to do well in the

future.

FY06 FY07 FY08 FY09 FY10 Avg

ROA 10.1% 20.5% 14.3% 11.5% 15.6% 14.4%

ROE 17.5% 35.6% 27.1% 21.1% 24.8% 25.2%

Exhibit 8: Financial performance FY06-FY10


Established track record. PEC's established track record has helped it

to secure contracts. The group has successfully executed a number of

projects in Singapore, UAE and China. In particular, the group's key

strengths are in the fabrication and installation of piping structures and

engineering, procurement and construction (EPC) services for plants/

terminals.

8/6/2019 PEC-110804-OIR

8/15


PEC L td

Exhibit 9: Significant projects

Source: Company

Close relationship with customers. PEC's major customers include

multinational engineering firms and major oil companies, such as Chiyoda

Corporation, Emirates Oil Company, ExxonMobil and Shell Eastern.Besides helping PEC to secure project and maintenance contracts, the

close working relationships it has with its customers also helped in its

overseas expansion.

8/6/2019 PEC-110804-OIR

9/15

P age 9 4 Au gus t 2 0 1 1

PEC L td

Exhibit 10: Major customers

Source: Company

Weaknesses

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 customers default, the group may need to write off part

of its debts. If its customers delay on payments, the group may be faced

with a liquidity squeeze. These risks are mitigated by the fact that (i) the

group's main customers are reputable large multinational corporations, and

(ii) that it always maintains a sizeable amount of cash reserves.

Geographical concentration in Singapore. Despite its overseas

expansion over the past several years, PEC's operations are predominantly

based in Singapore, where it has a number of fabrication facilities. This

makes it highly susceptible to event risk in Singapore. For example, a

power outage in Singapore's Jurong Island may cause delays to its project

and maintenance work, resulting in cost over-runs.

8/6/2019 PEC-110804-OIR

10/15

Page 10 4 Augus t 2 0 1 1

PEC L td

Exhibit 11: Revenue by geographical segments

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10

Singapore Middle East Asia Pacific (ex-SG)


Opportunities

Expansion into related industries. Given PEC's engineering and project

management expertise, there may be opportunities to expand into new or

related industries such as LNG, power generation or marine construction.

However, this move has to be carefully considered because the initial capital

outlay could be high.

M&A opportunities. PEC's current large cash-pile (S$168m of 31 Mar 11)

enables it to seek suitable M&A opportunities for inorganic growth. The

group could acquire smaller EPC companies in countries such as UAE or

Indonesia to diversify its geographical presence or target complementary

businesses to expand its service offerings to its customers.

Threats

Stiff competition. According to our channel checks, Singapore-based EPC

firms are facing competition within Jurong Island, and this has led to

increased margin pressure over the past several years. If this trend

continues, PEC's profitability may be heavily affected.

Rising labour costs may threaten profitability. PEC's operations are

labour intensive, and the group relies heavily on skilled foreign workers to

keep its operating costs low. As the supply of foreign manpower in Singapore

is subject to policies imposed by the Ministry of Manpower, changes in

government policy may lead to higher labour costs or manpower constraints.

8/6/2019 PEC-110804-OIR

11/15

P age 1 1 4 Au gus t 2 0 1 1

PEC L td

Section D: Financial Highlights and Analysis

Gross margins to remain between 20-30%. We expect gross marginsof both its projects and maintenance segments to remain within its historical

range of 20-30%. Project margin jumped from 20% in FY09 to 28% in

FY10, attributable mainly to a one-off settlement for some outstanding

project claims. Going forward, we believe that gross margins may moderate

due to higher labour costs and stiffer competition.

Exhibit 12: Gross margins by business segments

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


Projects Maintenance Overal l


Revenue growth may be lumpy. We expect some volatility in PEC's

top-line growth as project work, which accounted 73% of total revenue as

of FY10, is lumpy in nature. This is because the oil & gas and petrochemical

industries are cyclical sectors; a slowdown in these industries may lead to

reduced capital expenditures for related infrastructure projects. In addition,

revenue and profit recognition may be lumpy as a project progresses throughdifferent stages (i.e. from design and engineering to procurement to

construction).

8/6/2019 PEC-110804-OIR

12/15


PEC L td

Exhibit 13: Revenue growth

0

50

100

150

200

250

300

350

400

450

500


RevenueS$m

-20%

0%

20%

40%

60%

80%

100%

YoYGrowth

Proj. Rev. Maint. Rev. Overall Rev.

Proj Grow th Maint. Grow th Overall Grow th


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 2011. 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 the

opportunity arises.

No dividend policy. The group does not have a dividend policy as of this

point. For FY10, PEC paid a total dividend of S$10.2m, representing a

payout ratio of 20.7%.

Exhibit 14: Cash and cash equivalents


SGD (S$m) FY06 FY07 FY08 FY09 FY10 Mar 11

Revenue 149 237 315 440 467 88

Cash and cash equivalents 22 36 49 50 161 168

Cash (% of revenue) 14.9% 15.2% 15.6% 11.4% 45.9% N.M

8/6/2019 PEC-110804-OIR

13/15

P age 1 3 4 Au gus t 2 0 1 1

PEC L td

Section E: Valuation and Recommendations

Price/Earnings multiple approach. Using a simple average of comparable

peers listed in Singapore, the industry average forward PER is 6.4x. The

industry's average market cap is S$215m, lower than PEC's market cap of

S$244m.

Exhibit 15: Peer comparison

Source: OIR, Bloomberg (as of 3/8/2011)

Note

- EPS for Rotary Engineering are based on OIR's est imates, whi le that of Hiap Seng

Engineering and Mun Siong Corporation are based on Bloomberg's consensus

estimates.

- N.M: Not meaningful

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 of

S$0.67 per share. Potential price catalyst could from contract wins and/or

successful acquisitions.

EPS (S$) PE(x)

Rotary Engineering 460 0.810 0.12 7.0

Hiap Seng Engineering 123 0.405 0.06 7.1

Mun Siong Corporation 64 0.153 0.03 5.1

Simple Average 216 N.M N.M 6.4

PEC Ltd 262 1.025 0.19 -

Market Cap(S$m)

Current Price(S$)

Forward 12 monthsCompany

8/6/2019 PEC-110804-OIR

14/15


PEC L td

PEC's Key Financial Data

EARNINGS FORECAST BALANCE SHEETYear Ended 30 June (S$m) FY09 FY10 FY11F FY12F Year Ended 30 June (S$m) FY09 FY10 FY11F FY12F

Revenue 440.5 467.4 420.6 559.4 Cash and cash equivalents 50.4 160.8 170.0 199.2

Gross profit 91.4 123.2 113.6 145.4 Other current assets 104.9 82.5 81.8 127.7

Operating expenses -64.2 -70.6 -63.5 -84.5 Property, plant, equipment 56.4 60.2 69.1 68.7

EBIT 31.1 56.9 54.1 65.0 Total assets 214.2 309.2 326.7 401.2

Other income -0.9 0.3 -0.6 -0.6 Debt 0.1 0.1 0.1 0.1

PBT 30.2 57.2 53.4 64.3 Current liabilities excluding debt 94.3 110.4 93.3 123.2

Tax -5.6 -9.0 -9.1 -10.9 Total liabilities 97.9 115.0 97.8 127.8

PAT 24.5 48.2 44.3 53.4 Shareholders equity 105.0 177.6 208.9 248.9

Minority interest 3.6 3.4 4.4 5.3 Total equity 116.3 194.2 228.9 273.4

Net profit 21.0 44.8 39.9 48.1 Total equity and liabilities 214.2 309.2 326.7 401.2

CASH FLOW

Year Ended 30 June (S$m) FY09 FY10 FY11F FY12F KEY RATES & RATIOS FY09 FY10 FY11F FY12F

Op profit before working cap. 38.3 65.2 63.8 75.2 EPS (S cents) NA 17.9 15.9 19.2

Working cap, taxes and interest -5.2 42.8 -16.5 -15.9 NAV per share (S cents) NA 70.9 83.3 99.3

Net cash from operations 33.2 108.0 47.3 59.3 EBIT margin (%) 7.1% 12.2% 12.9% 11.6%

Purchase of PP&E -21.4 -11.3 -20.0 -11.0 PBT margin (%) 6.9% 12.2% 12.7% 11.5%

Investing cash flow -20.7 -13.9 -20.0 -11.0 Net profit margin (%) 4.8% 9.6% 9.5% 8.6%

Financing cash flow -4.2 21.8 -9.6 -8.9 PER (x) NA 5.7 6.4 5.3

Net cash flow incl. forex 2.4 110.4 9.2 29.1 Price/NAV (x) NA 1.4 1.2 1.0

Cash at beginning of year 50.4 160.8 170.0 199.2 Dividend yield (%) NA 0.0% 3.8% 3.5%

FD and cash pledged 0.0 0.0 0.0 0.0 ROE (%) 20.0% 25.2% 19.1% 19.3%

Cash at end of year 50.4 160.8 170.0 199.2 Net gearing (%) Net Cash Net Cash Net Cash Net Cash

Source: Company data, OIR estimates

8/6/2019 PEC-110804-OIR

15/15

P age 1 5 4 Au gus t 2 0 1 1

PEC L td

For OCBC Investment Research Pte Ltd

Carmen LeeHead of ResearchPublished by OCBC Investment Research Pte Ltd

SHAREHOLDING DECLARATION:The analyst/analysts who wrote this report holds NIL shares in the above security.

RATINGS AND RECOMMENDATIONS:OCBC Investment Researchs (OIR) technical comments and recommendations are short-term and tradingoriented.- However, OIRsfundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-monthinvestment horizon. OIRs Buy = More than 10% upside from the current price; Hold = Trade within +/-10%from the current price; Sell = More than 10% downside from the current price.- For companies with less than S$150m market capitalization, OIRs Buy = More than 30% upside from thecurrent price; Hold = Trade within +/- 30% from the current pr ice; Sell = More than 30% downside from thecurrent price.

DISCLAIMER FOR RESEARCH REPORTThis report is solely for information and general circulation only and may not be published, circulated,reproduced or distributed in whole or in part to any other person without our written consent. This reportshould not be construed as an offer or solicitation for the subscription, purchase or sale of the securitiesmentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in thispublication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy orcompleteness, and you should not act on it without first independently verifying its contents. Any opinion orestimate contained in this report is subject to change without notice. We have not given any considerationto and we have not made any investigation of the investment objectives, financial situation or particularneeds of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and noliability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipientor any class of persons acting on such information or opinion or estimate. You may wish to seek advicefrom a financial adviser regarding the suitability of the securities mentioned herein, taking into considerationyour investment objectives, financial situation or particular needs, before making a commitment to invest inthe securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connectedand associated corporations together with their respective directors and officers may have or take positionsin the securities mentioned in this report and may also perform or seek to perform broking and otherinvestment or securities related services for the corporations whose securities are mentioned in this reportas well as other parties generally.

Privileged/Confidential information may be contained in this message. If you are not the addressee indicatedin this message (or responsible for delivery of this message to such person), you may not copy or deliverthis message to anyone. Opinions, conclusions and other information in this message that do not relate tothe official business of my company shall not be understood as neither given nor endorsed by it.

Co.Reg.no.: 198301152E

PEC-110804-OIR

Documents

Transcript of PEC-110804-OIR