Thursday, 26 July 2012

My Thoughts on United Engineers

United Engineers is a company with generally 3 core businesses.

(1) Property development
(2) Hospitality/Commercial Property rental
(3) Engineering

It is a 100 year old company and counts OCBC Group & Great Eastern as its major shareholders.

Some key numbers (based on 1Q2012 financial statement) 

Number of shares issued (including convertibles): ~321m
Current share price: S$2.25
NAV: S$4.06
Ppty development Operating profit: 0
Rental Operating profit: S$14.5m
Engineering Operating profit: S$2.5m

EPS: $0.03 this quarter

My analysis based on earnings

I will be using 1Q'12 as a gauge for "worse case scenario" analysis as it is rather conservative, using  UE's profit from ONLY its recurrent income sources.
Let's assume the completion of UE Bizhub East and hotels, and the stabilisation of occupancy rates in Rochester Mall & Park Avenue Rochester.
The profit projection from these recurrent income would be S$15m/qtr or EPS S$0.045/qtr.
Based on current price of S$2.25, its PE based on its recurrent income stream alone would be an undemanding 12x.
This assumes ZERO profits from its Property Development & Engineering segments, and the sale of the SPVs to OCBC!

Orchard Gateway located beside Somerset MRT

My concluding thoughts

I have bought into UE at prices ranging from $2.20 to $2.50 and intend to collect more should the price fall below $2 in the upcoming 1 year due to a variety of reasons:
(1) Huge discount to NAV. (~50%)
(2) Near-term Catalyst of new streams of recurrent income from:
     -UE bizhub East (dec 2012)
     -Park Avenue hotel integrated with UE Bizhub east
(3) Near-term Catalyst of one-off sale of SPVs to OCBC. These SPVs were created to handle the
     development of Orchard Gateway & Hotel.
(4) Small number of shares issued will mean low liquidity but it'll mean strong EPS growth should
     earnings be boosted.

By buying at current price or even cheaper, i believe that i will be holding a company that will be substantially more valuable 1 year later due to its stronger recurrent income portfolio and its potential cash hoard.

On a side note, a hunch I have, is that by giving the big development project of Orchard Gateway to UE, plus UE's recent business direction towards generating more recurrent property income, OCBC might look at UE as a prospective "real-estate arm". Note also that OCBC no longer has a substantial stake in another real estate company now that it sold F&N.
I do recall that banks were directed by MAS to divest non-core assets since years ago.
If this still holds true, UE might get to purchase a stake in Orchard Gateway which will give it more recurrent income. It's just a thought though.

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