United Engineers (UEM SP) - UOB Kay Hian 2016-10-27: Gearing Up For Sale

United Engineers (UEM SP) - UOB Kay Hian 2016-10-27: Gearing Up For Sale UNITED ENGINEERS LTD ORD U04.SI

United Engineers (UEM SP) - Gearing Up For Sale

  • Major shareholders, OCBC and Great Eastern, have announced their intention to “strategically review their stake” in United Engineers (UE). A sale of 30% or more will trigger a mandatory offer. 
  • We believe the sale is “a question of when and not if”, since UE has been willingly put up for sale and there are numerous potential buyers present given its asset quality. 
  • UE is likely to be sold above book and investors will be rewarded for their wait. 
  • Initiate BUY with a target price of S$2.96.


INVESTMENT HIGHLIGHTS


UE is gearing up for sale with some prior obstacles removed. 

  • We believe that United Engineers (UE) is gearing up for sale and the sale is an eventuality rather than a possibility. This is because: 
    1. major shareholders OCBC and Great Eastern have announced that they are “strategically reviewing their stake” (where sales could trigger a mandatory offer), 
    2. the vacant CEO position is evidence of a non-operational status, 
    3. the series of non-core assets sales simplifies UE’s business, transforming it into a “pure” property play (including hard-to-value technology manufacturer, Mflex that was previously loss-making).

Willing seller and numerous potential suitors for UE. 

  • We believe that there could be numerous potential suitors for UE. Bloomberg highlighted OUE as a suitor (though OUE stated that there were no ongoing discussions then, implying a wait) and we would not be surprised if cash-rich China funds are interested. 
  • There is also a possibility that Straits Trading may revisit its interest, while the previously interested buyer, Charoen, cannot be overlooked as well.

UE (or its properties) likely to be sold above book. 

  • Regardless of who the buyer might be, we believe that UE or its properties will likely be sold above book value. 
  • From a property perspective, we note that the previous sale of its UE BizHub EAST was sold considerably above valuation. 
  • From a stake perspective, we view OCBC as a demanding seller that is unlikely to sell below book. 
  • As evidenced from its previous transactions, where all assets were sold comfortably above book.

Investors to get paid to wait. 

  • While there is no clear deadline as to when the sale will take place, investors can take heart in dividends that are likely to be paid out. 
  • Based on historical payouts in years of exceptional gains, UE is likely to pay a S$0.05 special dividend on top of the usual S$0.05, implying a 2016 yield of 3.9%.

Sale is a question of “when”, and not “if”. 

  • We are confident that the sale of UE is a question of “when” rather than “if”. 
  • While there may be some wait involved, it is unlikely that any sale would be done at a “bad” price. The primary risk lies in the timeline of the deal, but investors can take heart in being compensated for their wait with dividends.


VALUATION/RECOMMENDATION


Initiate BUY with a target price of S$2.96. 

  • As UE is gearing up for sale, we compute its target price based on the premium recent market transactions place on book value (1.04x BV). This is in line with historical observations that OCBC does not sell below book. 
  • Based on its 2Q16 book value of S$1.75b and recent disposal gains of around S$131m, we compute its currently estimated book value at S$1.88b. 
  • At 1.04x premium to book, we derive a target price of S$2.96 per share.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-27
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 2.96 Same 2.96



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