Initiating Coverage HOLD
Current Price: S$0.335
Fair Value: S$0.41
Established construction and engineering player. UE E&C is a medium-sized construction and engineering group with three main divisions: (i) Construction (FY10: 85% of total revenue), (ii) Mechanical and Electrical (M&E) engineering (8%) and (iii) Others (7%), including property development and rental/supply of tiles and industrial equipment. Its operations are centered mainly in Singapore (FY10: 82% of total revenue), although it also has a sizeable presence in Brunei. The company is 68% owned by United Engineers Group Limited (UEL), one of Singapore's most established engineering, construction and facilities management companies.
Good track record. The company has track records of over 30 and 25 years in construction and M&E engineering industries respectively. It has undertaken a wide range of construction projects including mixed development, residential, clubs, institutions (e.g. hospitals, military compounds, etc) and public infrastructures (e.g. MRT extension). For its M&E engineering, it provides services such as air conditioning and mechanical ventilation systems, fire protection and alarm systems and sanitary systems. Recently, the company is expanding on its power equipment business although we believe revenue contribution from the power business will remain small.
Watch out for credit and liquidity risks. UE E&C, like other construction companies, is exposed to credit risks as it offers credit terms to its customers. If any of its customer defaults or delays on its payments, the company may face a shortterm liquidity squeeze. We note that its account receivable days have increased to 118 days (as of FY10) from 99 days (as of FY09). Given that UE E&C's business is highly concentrated in Singapore, weaker demand from Singapore's construction and engineering industries may affect the company's financial performance severely. Other risks include execution risks (i.e. project delays) and rising materials / labour costs.
Initiate with HOLD; fair value estimate of S$0.41. In our view, UE E&C is a well-managed company with an established track record in construction and M&E engineering industries. However, it appears to suffer from a lack of market attention, presumably because of its small market size and concerns whether a slowdown in Singapore's property market would spill over to the construction sector. In addition, the company's shares are also considerably less liquid compared to its listed peers. Therefore, we value UE E&C at 3x its forward EPS (33% discount to the industry average PER of 4.5x) to obtain a fair value estimate is S$0.41. As the stock looks fairly valued at the moment, we initiate coverage with HOLD.
No comments:
Post a Comment