United Engineers - CGS-CIMB 2018-05-07: 1Q18 Operationally Stronger

UNITED ENGINEERS LTD ORD SGX: U04

United Engineers - 1Q18 Operationally Stronger

United Engineers’ 1Q18 net profit above our expectation at 38.3% of our FY18 forecast.
Overall property segment performed better, with lower losses in China.
Higher engineering & distribution contribution offset lower manufacturing earnings.
Maintain ADD with unchanged Target Price of S$2.94.

United Engineers reported a slight 1% y-o-y decline in 1Q18 revenue to S$105.2m. However, net profit improved 3% y-o-y to S$9m, thanks to lower distribution and other costs due to divestment of its liquefied petroleum gas (LPG) business at end-2017, reduced interest expense, and slight 1.4% pt improvement in gross margins to 43.5%.
1Q18 EPS of 1.4 Scts was above ur expectations, at 38.3% of our full-year forecast.

Property-related activities, as a whole, performed better y-o-y. As expected, property rental and hospitality operating profit fell 5% y-o-y on lower occupancy at UE Bizhub West with the departure of HP last year. This was offset by lower losses from property development activities with sales of completed units at Chengdu Orchard Villa.

United Engineers’ manufacturing activities continued to feel the adverse impact from the end-of-life of certain existing precision engineering manufacturing programmes while new programmes have yet to ramp up to reach mass production volumes. This was partly offset by higher contribution from its systems integration business and improved margins from its engineering and distribution operations.

The group plans to embark on asset enhancements initiatives (AEI) for its investment properties in Singapore, such as UE Bizhub City. This could include increasing property utilisation or optimising the size and use of its hospitality assets, in our view.
Management also indicated that it may look for selective acquisitions when the opportunity arises. The former activities should enable the group to improve its property performance and boost RNAV in the medium term.

We leave our FY18-20 earnings estimates unchanged. We maintain our RNAV of S$3.46 and Target Price of S$2.94, pegged at 15% discount to RNAV.
United Engineers is trading at 23% discount to RNAV. Hence we retain our ADD rating.
Potential re-rating catalysts could emerge from realising low-hanging fruits from any asset enhancements at its properties, which we have not factored into our current RNAV.
Downside risks could come from execution delays.

LOCK Mun Yee CGS-CIMB | https://research.itradecimb.com/ 2018-05-07

SGX Stock Analyst Report ADD Maintain ADD 2.940 Same 2.940