United Engineers (UEM SP) - UOB Kay Hian 2016-11-29: Take Profit Due To Uncertainty, Downgrade To HOLD

United Engineers (UEM SP) - UOB Kay Hian 2016-11-29: Take Profit Due To Uncertainty; Downgrade To HOLD UNITED ENGINEERS LTD ORD U04.SI

United Engineers (UEM SP) - Take Profit Due To Uncertainty; Downgrade To HOLD

  • With China planning to tighten control over overseas investments and due to the increased macro uncertainty following Trump’s win, buyers in the proposed UE disposal deal may now expect lower prices. As such, the likelihood of the deal not materialising in the near future has increased significantly and we opt to include a 10% margin of safety. We advise investors to take profit and collect at lower levels.
  • Downgrade to HOLD and reduce target price to S$2.75, based on 0.9x book value.
  • Entry price: S$2.50.



WHAT’S NEW


Policy control over Chinese overseas investments. 

  • According to Reuters, there were reports that China is planning to tighten control over Chinese companies looking to invest abroad so as to slow the surge in capital fleeing offshore. This includes “strict controls” on overseas deals valued at US$1b or more for state-owned companies intending to invest in property as well as Chinese companies seeking to invest in entities not related to their core business.

Macro uncertainty following Trump’s win. 

  • In the wake of Trump’s win in the US presidential elections, there has been increased uncertainty in the macro economy. As global funds pour into the US, the US$ has strengthened considerably against the S$ (S$1.43/US$ now vs S$1.38/US$ just before the elections).


STOCK IMPACT


Increased risk of deal taking time to materialise. 

  • We believe China’s policy control as well as the macro uncertainty will have an impact on when the UE deal will materialise as channel checks had earlier indicated that Chinese buyers had formed a significant portion of buyer interest. 
  • Global buyers may also demand lower prices given the macro uncertainty and it may be a while before both sides reach a consensus. As such, we believe the risk of the deal not materialising in the near future is now significantly higher.


VALUATION/RECOMMENDATION

  • Downgrade to HOLD and reduce target price to S$2.75. 
  • We believe a margin of safety is required. We build in a 10% discount with our target price reduced to 0.9x UE’s latest NAV of S$3.06/share, implying a 24.2% discount to our latest RNAV of S$3.63/share. 
  • We advise investors to take profit and collect at lower levels. Entry price is S$2.50.


SHARE PRICE CATALYST

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




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-29
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 2.75 Down 3.060






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