PEC Ltd. ("PEC" or the "Group") is a specialist engineering group servicing the oil and gas, petrochemical, oil and chemical terminal, and pharmaceutical industries. Our two core business activities are project works (currently being carried out in Singapore, Malaysia, Thailand, Indonesia, Vietnam, the PRC and the Middle East) and maintenance services (currently being carried out in Singapore and the PRC).
• EGM resolution for share buyback
• Potential capital optimization
• Undemanding valuation
EGM resolution for share buyback.
PEC Limited recently announced that it will hold an EGM on 10 Feb 2012 for a proposed share purchase mandate where the group will be authorized to purchase up to 10% of total issued shares (excluding treasury shares). The proposed mandate, if passed, will commence immediately and expire on its next AGM date (expected Nov 12). We believe shareholders would generally vote in favour of the resolution as it would provide direct support to PEC’s share price.
Potential capital optimization.
The proposed mandate could improve PEC’s return (i.e. ROA and ROE) by reducing the amount of unutilized cash. PEC has a very strong net cash position (S$156m as of end-Sep 11), which formed about 80% of its market capitalization. Although a strong cash position would reduce financing needs and provide flexibility to seek inorganic growth opportunities, a counter-argument could be made that unutilized cash would simply mean cash not put to work. In PEC’s case, we believe a share buyback program makes sense as (1) the group seems to have far more cash than its capital requirements, and (2) its share price appears to be severely undervalued.
Margin pressure to persist.
Meanwhile, we do not expect margin pressure to ease in the oil-andgas engineering and maintenance subsector. The uncertainty in the global markets continues to discourage investments in the downstream oil and gas, resulting in fewer projects and stiffer competition among service providers. For FY12F, we expect gross margins to fall to about 19% (FY11: 28%).
Undemanding valuation.
PEC’s share price appears to be steeply undervalued. Its last traded price is S$0.765, compared to NAV of S$0.80 and net cash of S$0.61 per share (as of end-Sep 11). Ex-cash, it is trading at just ~2.5x FY12F EPS. Maintain BUY with unchanged fair value estimate of S$0.92.
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