United Engineers

Maybank Kim Eng Research, June 13

UNITED Engineers (UE) has proposed a one-for-one renounceable rights issue to raise $490 million to reduce its borrowings for its recent acquisition of WBL, and increase UE's financial flexibility.

The rights issue has been priced at $1.50 per share, which indicates a 47.6 per cent discount to the last transacted price of $2.86 per share on June 10.

There are three options for current UE shareholders - to sell their renounceable nil-paid rights on the market, take up the rights issue to avoid dilution, and to sell all shares.

We think that the rights issue is clearly an aggressive action by the major shareholders to force the minority shareholders' hand. We downgrade to "sell" with a target price of $1.86, adjusted for rights issue shares.

A total of 326.6 million new shares will be issued, with gross proceeds of $490 million to be gained. Major shareholders such as OCBC and the Lee family have agreed to irrevocably undertake and subscribe for the rights issue.

This will account for 36.1 per cent of the total underwritten rights issue, inclusive of 12.6 million convertible stock units owned. In essence, the major shareholders will fork out $176.9 million, while the minority shareholders will have to provide the remainder $313.1 million.

What is the future value ex-rights issue? Assuming it is based on current share price of $2.66 per share, ex-rights price will be at $2.08 per share.

We expect there will be selling pressure as not everyone will take up the rights issue. There will be shareholders who may not be able to afford or willing to put in additional capital.

Discount to book narrows from this exercise. One of the key reasons on why we liked UE in the first place was its large discount to book.

Essentially, this exercise will be dilutive to current shareholders. Simply put, the price-to-book ratio will increase from 0.70 times to 0.79 times at current price levels, indicating a 12.9 per cent dilution at this level. We expect UE's current net gearing to fall from 116 per cent to 55 per cent.

We downgrade to "sell" and lower our target price to $1.86, inclusive of WBL acquisition costs, and apply a larger discount on the UE's property earnings.

SELL

United Engineers

CIMB Research on June 10

UNITED Engineers (UE) now has new business segments in the form of WBL. While some are unrelated to its core expertise, there are others that could be good fits. The wildcard is UE's execution ability in growing its auto and China property units and rationalising its non-core assets. We stay "neutral" for now, with UE trading at 0.7 times P/B, in line with historical average.

In this note, we explore the positives and negatives of UE's acquisition. We tweak FY2013-15 core EPS on higher occupancies and lift our target price to S$3.02 on a narrower 40 per cent RNAV discount (versus 45 per cent before) as we turn slightly more comfortable with WBL's inclusion.

Success in growing the auto and property units and rationalising non-core assets could be catalysts.

With the acquisition of a further 55.97 per cent stake in WBL and S$6.9 million in principal amount of convertible bonds, UE has to fork out an acquisition price totalling an estimated S$716 million. Assuming that this is 75 per cent debt-funded, UE will have to raise an additional S$537 million debt - increasing its pro-forma net gearing to 105 per cent from FY2012's 83 per cent, the highest among Singapore peers.

In our view, the negative impact on net gearing can be reduced by the divestment of WBL's technology segment - its 62 per cent stake in MFLEX and 77 per cent stake in MFS Technology. It is something UE is exploring.

Management had hinted at potential interests from various undisclosed parties.

We estimate proceeds of about S$491 million if this segment is divested, which could improve UE's balance sheet post-acquisition, result in a cleaner corporate structure and potentially lower its conglomerate valuation discount.

WBL's automotive unit has registered strong growth in the last three years; the business is expected to provide stable recurring income for UE.

Another key segment for WBL is its China property landbank (mixed and residential projects) acquired early in the cycle.

Although details are sketchy at the moment, our preliminary estimates show that the potential gross development value of the land could lift RNAV by S$0.32-S$1.28 a share. Execution is the wildcard, given the group's limited operational expertise in China.

We believe UE would need to show some tangible results before the market can reward the stock for its WBL acquisition.

NEUTRAL

United Engineers

Kim Eng on 31 Jan 2013

The fight for gold on Chinese ground. United Engineers has thrown in its bid envelope for WBL and sets the stage up for a counter response from Straits Trading Company as the former’s offer is significantly more aggressive than the latter’s. Even at SGD4.00 however, there could be upside for WBL as our rough table napkin calculation shows a potential SGD5.04-5.59 SOTP value for WBL. Financially, it would appear that STC is better placed than UE to pay more for WBL. Regardless of how things turn out however, OCBC is definitely playing a more aggressive role in unlocking the value of its non-core assets, as originally speculated by us. After a stellar run, UE may consolidate for now until the saga completes but the stock remains a BUY with a long term TP of SGD4.02.

United Engineers takes on Straits Trading for WBL prize. United Engineers has launched a takeover for WBL for SGD4.00 a share, higher by 19% than Straits Trading’s (STC) competing cash offer of SGD3.36/share and 15% above WBL’s book value of SGD3.48. UE is bidding in concert with OCBC, Great Eastern, and Lee Foundation. Together, they own 39% of shares including convertible bonds. UE also specifically highlighted that UE shareholders will still receive a final dividend SGD0.05 a share from WBL, unlike STC’s cash offer which does not include this dividend.

So how much is WBL really worth? The biggest question the market is probably asking now is what could WBL be worth? It is not covered by any broker in the market given its illiquidity and tight float, but it has been known for many years now that its claim to fame is a highly valuable China property portfolio acquired many years ago, and is still held at cost in its books. These property assets include properties under development, raw landbank as well as investment commercial properties in Sichuan and Liaoning provinces as well as Suzhou and Shanghai. Our rough back-of-the-envelope calculation for WBL’s SOTP value ranges from SGD5.04 a share to SGD5.59.

Could Straits Trading counterbid? The second biggest question is would there be a counterbid by STC? STC’s Chairman Chew Gek Khim, the granddaughter of ex-OCBC Chairman Tan Chin Tuan, certainly has shown her determination in wanting to take WBL, going to the extent of teaming up with two long-term funds to wrest control of 43% of WBL. Financially, it possibly has the capacity to raise its offer. Assuming it raises its bid to WBL’s pre-halt price of SGD4.20, STC’s net gearing of 0.44x will rise to 1.14x, which would still be lower than the 1.80x level that UE’s net gearing will rise to if it succeeds with a SGD4.00 offer.

OCBC shows its value-unlocking hand. After a stellar run since we initiated coverage in Dec 2012, UE’s share price may start to consolidate in the short term until the bid is over and the winner is known. In the long run however, this confirms our view that UE is shaking off its former dowdy image and turning more rowdy in raising shareholder value with OCBC’s aid. If it wins WBL, it would have the added allure of the China property angle despite a spike in gearing, and even it does not succeed, OCBC will continue to unveil its value-unlocking hand.

United Engineers

Kim Eng on 29 Jan 2013

Shaking off the past. Having further studied United Engineers’ acquisition of 79 Anson, a fully-tenanted commercial building that it announced in Dec last year, and its first foray into the CBD, we remain convinced that this is a good deal for UE, despite market concerns that it paid more than it should have for an older property when compared to Mapletree Commercial Trust’s recent acquisition of Mapletree Anson. UE can either raise below-market rental rates once a major lease expires in 2016, which would generate 17% upside to 79 Anson’s current rental income (11.8% of FY13 group EPS) or in a more adventurous scenario, redevelop the under-utilised building for more upside. More importantly, this is a major deal accounting for 42% of market cap, and it shows UE is waking from its sleep and making more market-savvy moves. BUY with RNAV-based TP of SGD4.02.

First foray in to the CBD. In December 2012, UEL announced that it has entered into a sale and purchase agreement with CPF Board and SEB Asset Management to purchase 79 Anson for SGD410m, or SGD2,028.8psf. With 19 floors of offices and 3 levels of parking, the freehold property has a total NLA of 202,092 sq ft. It is currently 99% tenanted, with Kellogg Brown & Root Asia Pacific (KBR) holding 33% of NLA. The building will be renamed UE Bizhub Tower.

Room to grow rental. Annualised FY12 EBIT of SGD11.1m implies a net rental of SGD4.60psf and net yield of 2.7%. In our view, there is room for rental growth. While it is unlikely for 79 Anson to reach MapleTree Anson’s rental rates at SGD7.30psf, CCT’s Twenty Anson just across the road commands a passing rent of SGD6.20psf and gross yield of 3.5%, which implies a possible 17% upside. Looking at a broader base, the Tanjong Pagar area’s market rate is commanding an average gross rental rate of SGD8psf.
Can also redevelop the whole building. Currently, 79 Anson’s NLA implies a 70% efficiency usage. The lease of 79 Anson’s anchor tenant, KBR, will expire in 2016, which may offer room for more possibilities of redevelopment then. For now, UEL has expressed intent to keep it as a long-term interest in building a more stable base of rental income.

Reiterate BUY. This purchase reinforces our view that UE is shaking off its past legacy headaches and is steamrolling ahead to build up its investment property portfolio, now worth over SGD2b. Maintain BUY with a TP of SGD4.02 (from SGD4.11 due to increased leverage to make this acquisition).