How Pan-United could reap benefits from CXP venture

It could boost 15% of its earnings.

According to CIMB, PUC intends to boost its revenue across the region by increasing its stake in CXP. This decision is probably the most important one management has to make in recent times to lock in the company’s longer-term prospects.

This latest deal which costs S$101m could add 14-15% to PUC’s FY14-15 net earnings after accounting for additional interest costs, in CIMB's estimation.
 

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Its latest stake upsize in CXP has the potential to add 14-15% to our FY14-15 EPS after accounting for interest costs from any debt taken. Our target price accordingly climbs, still based on residual income. 

Upgrade to Outperform from Neutral with catalysts expected from earnings contributions from very chunky MRT projects in the BBR segment and its improved earnings profile.

Integral part of PUC
CXP is an integral part of PUC, being its second-largest source of earnings. CXP contributed 9% to group revenue and 16% to group PATMI in FY12. Its operating momentum is expected to continue in the next few years.

Creating efficient capital structure
We previously argued that PUC could raise shareholders’ value by optimising its capital structure.

Its latest stake acquisition is the first step towards that, we believe, and is the clearest manifestation of management’s deviation from its usual conservative style. Assuming that cash is upstreamed from SCDC (estimated at S$10m), the implied cost of its stake upsizing is S$91m.

We think PUC could fund this byborrowing S$60m and using S$31m from its cash hoard. If PUC were to fund its entire acquisition with debt, its net gearing would only increase to 0.12-0.14x in FY13-14.

This should still be comfortable for management, we believe, with PUC’s highest-ever gearing being 0.2x in 2004.