UE E&C

Kim Eng on 31 Aug 2012

Construction firm with great heritage. UE & C is a local construction and engineering company spun off from its parent, United Engineers (UE) in February 2011. The principal entity is Greatearth Construction, a reputable grade A1 contractor with more than 30 years of history, founded by current UE E&C CEO Mr Chua. Today, it handles a wide range of work including M&E and power solutions.

Why we are highlighting this stock. We see very deep value, with the stock trading below its book value of SGD 59 cents/ share, with a net cash of SGD 39 cents/ share or 81% of its market cap. Working capital
requirements are minimal, as evident from the SGD50m free-cash flow for the past two financial years. We see a good chance of bumper dividend distributions which will help unlock shareholder value.

Reasons why we think this is not a value trap. Even as they generate strong cash flow, many construction companies delve into property development rather than to distribute more dividends. In the case of UE&C, their non-competing agreement with UE restricts them to taking up not more than a 30% stake in development projects. This stake allows UE&C to secure the construction project without a tender as well as an additional design aspect which boosts project margins.

Parent company may be cash-hungry. UE E&C is 68% owned by UE, which is also in property development, water and environmental projects. These are capex-intensive businesses, and they will appreciate dividend streams from UE E&C, especially when the latter is sitting on a cash pile. UE is in turn 20% owned by OCBC, which appears to be in a divestment mode for non-core assets. Given that UE&C is run independently with less than 10% of its projects from UE, a corporate restructuring to unlock value may be on the horizon.

Trading at just ex-cash PER of 2.2x. UE E&C achieved a net profit of SGD10.4m for 1H12, with minimal contribution from property development. We believe its current net orderbook of SGD650m is supportive of at least this run-rate till 2014F. This would translate to an ex-cash PE of just 2.2x and P/B of 0.95x. While there is no dividend policy, management is open to maintaining last year’s dividend of SGD 6 cents/ share, which would work out to a dividend yield of 11%.