Slowing faster than expected. Pan-United Corp (PAN) reported 1Q09 revenue of S$128.3m (+10% YoY, -12% QoQ) and PATMI of S$9.9m (-15% YoY, -22% QoQ). The better topline was contributed mainly by greater volume of Ready Mixed Concrete (RMC) sold but softening prices and thinner margins took a toll on PAN's profit. While we signalled a slowing down in our previous reports, we did not expect the collapse of RMC prices of this magnitude.

Forecasts for RMC business. Business for the RMC business continues to be strong with infrastructure developments continuing on their run in 2009 (Exhibit 1 shows sustained volumes). However, competition and the fall in raw material costs have pressured selling prices. While the fluctuation clauses work to help buffer rising costs in the commodity boom cycle, it also works in a counter cycle to align prices to the current market environment. On top of decreasing ASPs for RMC, we also think that some competition has entered the market with "low-ball bids" to win some future work despite attaining thinner margins. Over the rest of 2009, we are expecting margins to eventually stabilise and possibly trend upwards again as commodity prices start its trek up. While the thinning margins will work against PAN's earnings in the near future, we think that it will eventually weed out weaker players who have no scalability to compete.

Port and Shipping. Management has signalled that the pick up in these two divisions will help buffer the fall in bottomline contribution from its key RMC business. In particular, the fully utilisation of its larger fleet of tugs and barges will help prop up bottomline as charter incomes from Singapore flagged vessels are tax exempt. The port in China is also seeing signs of life with China's stimulus package flowing through the system.

Share price run up lowers yield. We have refined our estimates and DDM parameters (Ke: 15% to 10%) with changes in required returns. Our DDM fair value is now S$0.52 (prev. S$0.47). While PAN's share price has risen, it continues to lag the FSSTI in price movements. Investors have typically piled into the company for its good dividend yields. However, the rise in its share price has caused FY09 yield to fall to ~6.8% while the stock trades at ~8x FY09F PER (above 7.3x FY08 PER where earnings grew at a much faster pace). With the limited upside, we are downgrading our rating to a HOLD.