United Engineers - DBS Research 2016-10-11: Centenarian with Prized Commercial Portfolio

United Engineers - DBS Research 2016-10-11: Centenarian with Prized Commercial Portfolio UNITED ENGINEERS LTD ORD U04.SI

United Engineers - Centenarian with Prized Commercial Portfolio

  • Established centennial Singapore company with key businesses which are subject to a potential take-over as major shareholders look to exit.
  • Substantial portion of prized commercial portfolio are on either 999-year leasehold or freehold titles.
  • Upside for acquirer comes from active leasing of empty space while more capex is needed to be spent to spruce up an ageing portfolio.


The Business 


A cleaner “real estate play” after a series of divestments of non-core assets in the last two years with prized commercial portfolio. 

  • United Engineers is a diversified conglomerate with business in real estate, engineering and distribution. 
  • Since 2014, the group has looked to focus on its hospitality and real estate divisions and started to divest its noncore assets since 2014 in a bid to streamline its businesses. 
  • The latest is the completion of disposal of its largest subsidiary in July 2016, Multi-Fineline Electronix Inc (MFLEX), a manufacturer of printed circuits listed on NASDAQ which will reap close to S$115m in gains for the group.

A potential take-over prospects as major shareholders look to sell out.

  • Major shareholders, OCBC, Great Eastern and affiliates, have announced a potential sale of their combined stake of c.32% of the stock, which will spark a general offer, based on SGX listing rules. 
  • We believe UE will be of interest to prospective acquirers given the group’s strong recurring income and well-positioned assets – UE Bizhub City (UE Square), One North mixed development, as well as UE Bizhub West which are strategically located at the fringe of the Central Business District (CBD) or in key suburban commercial districts. 
  • We believe that potential acquirers might include listed developers, private property funds or overseas developers looking to increase their footprint in Singapore.


The Stock 


Valuation. 

  • Our target price of S$2.75/share is based on 1.0x P/NAV, based on historical transactions for developer’s acquisition. 
  • Our revalued NAV (RNAV) for UE at S$3.30/share is at a 20% premium to NAV of S$2.75/share. 
  • The stock is currently trading c.6% below our price target of S$2.75/share.

What is in it for acquirers. 

  • Apart from acquiring a commercial portfolio that sits on substantially FH/999-LH land and upside to earnings through active leasing of empty spaces, we believe that more capital is needed to be spent to spruce up the portfolio in order to remain relevant to tenant needs. This could point to higher values in the medium term.

Risks: 

  • Lacklustre sales and lease for the China projects, Chengdu Orchard Villa and Shenyang Orchard Summer Palace.



NOT RATED
Return *: 2
Risk: Moderate
Potential Target 12-mth*: S$ 2.75 (6% upside)



Rachel Tan DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-10-11
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 2.75 Same 2.75

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.


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