TEE International: Well-placed for growth (OCBC)

Defensive M&E engineering business with a regional footprint. TEE International (TEE) built up its M&E engineering and general construction business over the years with many notable projects, including Marina Bay Sands. The specialised M&E engineering area that it operates in is also a fairly defensive business compared to general construction (typically flourishes during periods of building boom). It is also growing its presence regionally, having already won contracts in Malaysia and Thailand, as its explores more growth opportunities outside of Singapore.

Fast growing real estate arm. The group only started generating revenue from its real estate business in FY09, but this has grown quickly since. Currently, it has about 10 Singapore developments (three of which are wholly owned) and four overseas developments in progress. TEE is aiming to continue growing its development business and has targeted contribution of about 40% of total revenue in future, same as its M&E engineering arm. We believe TEE can achieve this as it has gained significant experience through undertaking many developments over the past few years.

Healthy growth prospects for its dual engine growth model. TEE's long standing track record in the defensive M&E space and its regional footprint will help to renew its order books. Furthermore, the group has done well during the past few years in growing a complementary property development business. In a few short years, it has accumulated experience in residential development and most recently, signaled its intention to take on commercial development in Malaysia too. We view TEE's move to expand its real estate development expertise outside of Singapore as positive.

Initiate with BUY. We like TEE for 1) its track record in the defensive M&E space, 2) its regional footprint providing it with opportunities to win contracts beyond Singapore, and 3) the healthy growth prospects of both its M&E and property development businesses. We adopt a SOTP valuation methodology to value TEE - a multiple based approach applied to value its M&E/construction business (5x P/E ratio on FY12 estimates) and a RNAV approach for its development arm. We derive a fair value estimate of S$0.34, implying upside of around 41%, and therefore a BUY rating. We also like TEE for its decent dividend payout, and based on our EPS estimates, it can potentially offer 5%-7% dividend yield.