Worst is over at last for PEC

Rotterdam project issues are settled.

According to OCBC, it believes that the worst is finally over for PEC. As a brief recap, the group had delays and cost overrun issues with its Rotterdam project in 2011 and 2012.

Here's more from OCBC:

However, it has already completed the job and made a full provision for the project losses. Looking ahead, we believe the group will focus its energies on growing its business in the Middle East and Southeast Asia regions.

One issue that PEC still faces is the tight labour market in Singapore. As the Singapore government tightens the foreign labour supply, the group would have to grapple with fewer foreign workers and find ways to raise its productivity.

In the near term horizon, this would mean higher manpower costs. Over the medium- to longer-term horizon, we are less negative and believe that a margin reversion is likely to happen.

This industry is already struggling with extremely low margins that are unsustainable. With the current squeeze in the foreign labour supply, the industry may finally see some consolidation with weaker players being weeded out.

The larger and stronger players like PEC should survive and do well. Indeed, the oil refineries in Jurong Island will always need subcontractors to service their plants. It is also in their best interests to see that its subcontractors are earning healthy level of margins.

We think market reaction to PEC’s higher manpower costs in 3Q12 is overly negative. It may not have factored in the possibility of a margin reversion, which we think is likely in the medium term horizon.

With net cash representing more than 70% of current market cap, current valuation for PEC is attractive. Maintain BUY with unchanged fair value estimate of S$0.76 (0.9x FY13F P/B).

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