We met with UE E&C’s management recently to understand more about its stellar FY11 results, which were significantly above our expectations. During the year, it posted a 160% YoY increase in net profit to S$64m (FY10: S$31m) on a 6% YoY increase in revenue to S$371m (FY10: S$351m). This was mainly due to accounting changes as a result of INT FRS 115 adoption and completion of several key projects. We keep our S$0.65 fair value estimate, but due to the 30% upside hurdle for small-cap counters, we downgrade our rating to HOLD.
S$64m net profit for FY11
We met with UE E&C’s management recently to understand more about its stellar FY11 results, which were significantly above our expectations. During the year, it posted a 160% YoY increase in net profit to S$64m (FY10: S$31m) on a 6% YoY increase in revenue to S$371m (FY10: S$351m). This was attributable to (i) accounting changes as a result of INT FRS 115 adoption, and (ii) completion of Park Central @ AMK, The Rochester and Marina Bay Sands projects. The group’s gross margin increased to 23.3% from 16.8% on lower material prices and improved productivity. UE E&C declared a bumper dividend of 6 Scts (ordinary: 2 Scts; special: 4 Scts).
What is INT IFS 115?
In Aug 2010, the Accounting Standard Council (ASC) issued INT FRS 115, clarifying recognition of revenue and expenses on sales of a real estate unit before construction is completed. UE E&C has since adopted INT FRS 115 and changed its revenue recognition for development projects to completion-of-construction method (from percentage-of-completion). With the accounting change, previous revenue and expenses recognized for the Park Central @ AMK project (TOP in 3Q11) in FY09-10 were reversed and booked in FY11 (full year results). Understandably, this accounting change boosted FY11 results heavily (we estimate about 40% of FY11’s earnings were from the Park Central Project) and will lead to lumpiness in earnings going forward.
A busy 2012
We believe that 2012 is going to be a busy year for UE E&C as it continues to execute on its projects on-hand. However, as several of its key projects (i.e. Austville Residences and Pasir Ris EC) will achieve TOP only in FY13-14, FY12 profit and revenue recognition may dip. We keep our S$0.65 fair value estimate (on 0.85x FY12F P/B); but due to the 30% upside hurdle for small-cap counters, we downgrade our rating to HOLD.
We met with UE E&C’s management recently to understand more about its stellar FY11 results, which were significantly above our expectations. During the year, it posted a 160% YoY increase in net profit to S$64m (FY10: S$31m) on a 6% YoY increase in revenue to S$371m (FY10: S$351m). This was attributable to (i) accounting changes as a result of INT FRS 115 adoption, and (ii) completion of Park Central @ AMK, The Rochester and Marina Bay Sands projects. The group’s gross margin increased to 23.3% from 16.8% on lower material prices and improved productivity. UE E&C declared a bumper dividend of 6 Scts (ordinary: 2 Scts; special: 4 Scts).
What is INT IFS 115?
In Aug 2010, the Accounting Standard Council (ASC) issued INT FRS 115, clarifying recognition of revenue and expenses on sales of a real estate unit before construction is completed. UE E&C has since adopted INT FRS 115 and changed its revenue recognition for development projects to completion-of-construction method (from percentage-of-completion). With the accounting change, previous revenue and expenses recognized for the Park Central @ AMK project (TOP in 3Q11) in FY09-10 were reversed and booked in FY11 (full year results). Understandably, this accounting change boosted FY11 results heavily (we estimate about 40% of FY11’s earnings were from the Park Central Project) and will lead to lumpiness in earnings going forward.
A busy 2012
We believe that 2012 is going to be a busy year for UE E&C as it continues to execute on its projects on-hand. However, as several of its key projects (i.e. Austville Residences and Pasir Ris EC) will achieve TOP only in FY13-14, FY12 profit and revenue recognition may dip. We keep our S$0.65 fair value estimate (on 0.85x FY12F P/B); but due to the 30% upside hurdle for small-cap counters, we downgrade our rating to HOLD.
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