United Engineers (UEM SP) - UOB Kay Hian 2016-11-14: 3Q16 Successful Disposals

United Engineers (UEM SP) -  2016-11-14: 3Q16Successful Disposals UNITED ENGINEERS LTD ORD U04.SI

United Engineers (UEM SP) - 3Q16 Successful Disposals

  • United Engineers’ (UE) 3Q16 results were largely in line with our expectation with the disposal of its subsidiaries (MFLEX and its environmental engineering business) contributing the bulk of the profit. 
  • The cash proceeds have also reduced net gearing to 27.8%. 
  • While its outlook is expected to be lumpy due to accounting methodology, we believe the focus should not be on future earnings as UE is geared for sale. 
  • Reiterate BUY with a higher target price of S$3.06, based on 1.0x UE’s latest NAV.



RESULTS


3Q16 results in line with expectations. 

  • United Engineers’ (UE) 3Q16 earnings were largely in line with our expectation with attributable profit of S$11.7m (+9.8% yoy) from continuing operations and S$123.0m from discontinued operations. 
  • Discontinued operations relate primarily to MFlex and its environmental engineering business. Other income grew 89.7% yoy to S$11.0m with S$5.0m from insurance compensation and S$5.0m from the reduction of provisions, more than offsetting a drop in gross profit as development on Eight Riversuites completes.
  • Net gearing reduced following disposal completion. Net gearing fell to 27.8% as the group received S$233.9m net from the disposal of subsidiaries.


STOCK IMPACT


Lumpy outlook for continuing operations. 

  • With the disposals, the remaining property business should form the bulk of the business going forward. Due to the completion-of-construction accounting method, there will likely be volatility in the recognition of revenues and profits. 
  • Rental income will reduce the volatility but there will be downward pressures as the Singapore market faces growing supply amid softening demand. 
  • Nonetheless, we believe the focus now is not on the future earnings for continuing operations.


EARNINGS REVISION/RISK


Future earnings not the focus as UE is poised for sale. 

  • There is no change to our earnings forecasts.
  • We would highlight to investors to not to read too much into future earnings at this point in time as they are less significant to valuation given that UE is poised for sale.


VALUATION/RECOMMENDATION

  • BUY with a higher target price of S$3.06, based on 1.0x UE’s latest NAV of S$3.06/share. This is because UE is geared for sale and historical observations indicate that OCBC does not sell below book. This implies a 15.9% discount from our latest RNAV of S$3.63.


SHARE PRICE CATALYST

  • Newsflow on new potential buyers or progress in the sale of the company.
  • Further sale of other subsidiaries.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-14
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.06 Same 2.960




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