PEC Ltd. – Value Analysis (SINGAPORE:IX2) : December 26, 2017

Capitalcube gives PEC Ltd. a score of 56.

Our analysis is based on comparing PEC Ltd. with the following peers – Boustead Singapore Limited, United Engineers Ltd., Hock Lian Seng Holdings Limited, Rotary Engineering Limited., Tee International Limited, Top Global Ltd., Koh Brothers Group Limited and OKP Holdings Limited (F9D-SG, U04-SG, J2T-SG, R07-SG, M1Z-SG, BHO-SG, K75-SG and 5CF-SG).

Investment Outlook

PEC Ltd. has a fundamental score of 56 and has a relative valuation of UNDERVALUED.

Fundamental Score

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Company Overview

  • From a peer analysis perspective, relative outperformance last month is up from a median performance last year.
  • It’s current Price/Book of 0.69 is about median in its peer group.
  • The market expects IX2-SG to grow at about the same rate as the peers and to maintain the median returns it currently generates.
  • IX2-SG has relatively low net profit margins while its asset efficiency is relatively high.
  • Compared with its chosen peers, changes in the company’s annual earnings are better than the changes in its revenue, implying better than median cost control and/or some economies of scale.
  • IX2-SG‘s return on assets currently and over the past five years is around the peer median and suggest that it does not have any particular operational advantages versus peers.
  • The company’s median gross margin and relatively low pre-tax margin suggest high operating costs versus peers.
  • While IX2-SG‘s revenues in recent years have grown faster than the peer median, the market gives the stock a P/E ratio that is around peer median suggesting that the market has some questions about the company’s long-term strategy.
  • The company seems to be over-investing in a business with median returns.
  • IX2-SG has the financial and operating capacity to borrow quickly.

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Leverage & Liquidity

IX2-SG has the financial and operating capacity to borrow quickly.

  • With debt at a relatively low 15.70% of its enterprise value compared to an overall benchmark of 25% (Note: The peer median is currently 15.76%), and a well-cushioned interest coverage level of 56.76x, IX2-SG can probably borrow quickly. We classify the company as Quick & Able in terms of its capacity to raise additional debt.
  • All 8 peers for the company have an outstanding debt balance.

IX2-SG has maintained its Quick & Able profile from the recent year-end.

  • IX2-SG‘s interest coverage is its highest relative to the last five years and compares to a low of -8.03x in 2015.
  • The increase in its interest coverage to 56.76x from 32.40x (in 2017) was also accompanied by an increase in its peer median during this period to 15.94x from 8.56x.
  • Interest coverage rose 16.99 points relative to peers.
  • IX2-SG‘s debt-EV continues to trend upward and is above (but within one standard deviation of) its five-year average debt-EV of 1.10%.
  • While its debt-EV increased to 15.70% from 14.60% (in 2017), its peer median decreased during this period to 15.76% from 22.80%.
  • Relative to peers, debt-EV rose 8.13 percentage points.

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Key Liquidity Items

Company Debt/Enterprise Value (%) Current Ratio Interest Coverage (x) Cash Flow To Total Debt (%)
Boustead Singapore Limited 22.3 2.28 23.41 78
United Engineers Ltd. 34.49 1.87 2.59 6.62
Hock Lian Seng Holdings Limited 15.76 2.14 57.85 310.54
Rotary Engineering Limited. 10.37 1.3 15.94 116.92
Tee International Limited 66.08 1.57 0.59 3.05
Top Global Ltd. 12.77 3.35 -3.98 -5.37
Koh Brothers Group Limited 61.6 1.11 -3.6 -2.31
OKP Holdings Limited 9.13 2.42 199.33 673.79
PEC Ltd. 15.7 2.16 56.76 290.6
Peer Median 15.76 2.14 15.94 78
Best In Class 9.13 3.35 199.33 673.79

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Company Profile

PEC Ltd. engages in the provision of mechanical engineering and contracting services. The company operates its business through the following segments: Project Work, Plant Maintenance & Related Services and Other Operations. The Project Work segment relates to provision of engineering, procurement and construction services for certain aspects of plant projects, such as tankage and/or piping work, procurement to the oil and gas, petrol-chemical, pharmaceutical and oil and chemical terminal industries. The Plant Maintenance & Related Services segment relates to a full discipline of maintenance services provided to the oil and gas, petrochemical, pharmaceutical and oil and chemical terminal industries. The Other Operations segment relates to services provided through the company’s subsidiaries whereby heat treatment, information technology services/products and construction equipment leasing services are provided. PEC was founded on January 8, 1982 and is headquartered in Singapore.

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