UE E&C

OCBC on 17 Aug 2012

UE E&C’s 2Q revenue and net profit increased by 51% and 62% QoQ to S$85.5m and S$6.4m respectively. The construction pace hastened in 2Q and we expect it to pick up further in 2H12F as most of its development projects (i.e. Austville) are now substantially sold. Operating margin improved to 10.5% (1Q12: 7.0%), but remains within the typical range of 7-12%. The group needs to quickly replenish its order-book (est. S$400m) as the majority of its existing construction and engineering projects are due for completion within a year (by Aug 2013). We continue to like UE E&C for its disciplined approach in project bidding and believe it is well-positioned against recession risks. Maintain BUY with unchanged fair value estimate of S$0.71.

2Q12 net profit at S$6.4m
UE E&C’s 2Q revenue and net profit increased by 51% and 62% QoQ to S$85.5m and S$6.4m respectively. The construction pace hastened in 2Q and we expect it to pick up further in 2H12F as most of its development projects (i.e. Austville) are now substantially sold. Operating margin improved to 10.5% (1Q12: 7.0%) and remains within the typical 7-11% range. As of end of June 2012, it maintains a strong net cash position of S$104m.

Labour crunch
According to the management, the construction industry is facing a labour crunch with stricter foreign manpower quota. To alleviate labour supply concerns, UE E&C will focus on training and retaining its higher-skilled workforce. It will also continue to improve its processes and introduce new technology in project execution.

A weaker order-book
UE E&C needs to quickly replenish its order-book (est. S$400m) as the majority of its existing construction and engineering projects are due for completion within a year (by Aug 2013). However, project bidding can be tricky especially in the current environment. Besides the labour supply issue, contractors need to be wary of counterparty risks of their developers and suppliers. Should the slowdown continue, weaker contractors could also run into cash-flow problems.

Good risk control
We continue to like UE E&C for its disciplined approach to project bidding. Its large projects are usually with government-linked entities or reputable business partners, implying lower counterparty risks. Its EC projects also carry lower risk – buyers need to fulfill a minimum occupancy period and are therefore less likely to be speculators. Maintain BUY with unchanged fair value estimate of S$0.71.