UE E&C

OCBC on 11 May 2012

UE E&C (UEEC) reported its 1Q12 results last evening. 1Q12 revenue and net profit fell by 35% and 19% YoY to S$56.6m and S$4.0m respectively, mainly due to lower contribution from existing projects. That said, we note that revenue recognition of construction contracts are usually lumpy in nature, and may not be an accurate reflection on the progress made on DBSS/EC projects. Looking ahead, we fear that labour costs could rise given the stricter foreign manpower quota. Therefore, we eased our gross margin assumption to 17-18% (previously: 20%). This in turn lowered our SOTP-derived fair value to S$0.71 (previously S$0.82). Maintain BUY.

1Q results
UE E&C (UEEC) reported its 1Q12 results last evening. 1Q12 revenue and net profit fell by 35% and 19% YoY to S$56.6m and S$4.0m respectively, mainly due to lower contribution from existing projects. That said, we note that revenue recognition of construction contracts are lumpy in nature, and may not be an accurate reflection on the progress made on DBSS/EC projects. During the quarter, administrative cost also fell by 13.1% YoY to S$2.6m (1Q11: S$3.0m) due to an absence of listing expenses. Other income jumped to S$1m (1Q11: negligible) from fair value gains on investments.

Lumpy revenue recognition
Revenue recognition on construction contracts typically follows the percentage-of-completion (POC) method. However, INT FRS 115 requires the use of completion-of-construction (COC) method for DBSS and EC projects. This inevitably leads lumpy recognition of revenue (and profit) after a DBSS/EC project obtained TOP. To illustrate, UEEC’s FY11 net profit doubled to S$64.4m (9 months: S$30.2m) after its DBSS project, Park Central @ AMK, had obtained TOP in 3Q11. Looking ahead, we expect UEEC to begin work on its latest EC project in Pasir Ris (‘Watercolours’) in 2H12 and complete it by 2015. This also implies that the construction work done on the project may not be fully recognized until 2015.

Labour crunch
Besides the Pasir Ris EC project, UEEC is also working on the Austville Residences, National Continuing Education & Training Campus and MGM Grand Ho Tram projects. Although overall gross margin improved slightly to 15.1% (1Q11: 14.0%), we fear that labour costs could rise given the stricter foreign manpower quota for the construction industry. Therefore, we eased our gross margin assumption to 17-18% (previously: 20%). This in turn lowered our SOTP-derived fair value to S$0.71 (previously S$0.82). Maintain BUY.