3Q earnings preview. Construction firm UE E&C is set to announce its 3Q results early next month. We do not anticipate any surprises this quarter, unlike in 2Q11 when it booked a S$2.5m gain from disposal of investment properties. We believe the group should report revenue of about S$70-80m and net profits of about S$8-10m.
Construction contribution should hold steady. UE E&C's construction segment, which constitutes about 79% of the group's total revenue as of 1H11, should continue to deliver through consistent execution of its projects in its order book. Its declared order book of S$632m (as of 31 Dec 2010) should provide sufficient earnings stability over the near term. Looking forward, the management believes that Singapore's construction activity would remain healthy due to the number of large projects in the pipeline, such as the South Beach mixed development, expansion of MRT lines and construction / upgrading of public schools.
Lumpiness in M&E engineering. While we believe that the group's results should come in line with our estimates, the lumpy M&E engineering segment could throw our forecasts off. As the volume of its M&E engineering work (FY10: S$31m) is only about one-tenth of its construction business (FY10: S$324m), lumpy revenue recognition on a single M&E contract could easily swing the quarterly results. That said, normalized revenue contribution of M&E engineering should come up to around 10-15% over an average oneyear period.
Power business will take time to ramp up. We think it is unlikely to see any meaningful contribution from the new power business. Recall that UE E&C has injected S$5m (part of its IPO proceeds) into its whollyowned subsidiary UE-Tradetec (Singapore) Pte Ltd to expand its power solutions business. Although we like the move to diversify the group's income streams, we believe it will take some time to overcome the learning curve and cultivate business relationships with clients and partners before the new business can take off.
Maintain HOLD. While we are seeing some softening of demand in the property segment, construction demand seems fairly stable for now. Thus, we are keeping our FY11F and FY12F estimate intact. Maintain HOLD with fair value unchanged at S$0.41.
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