UE E&C

OCBC on 5 Sept 2012

Since we upgraded UE E&C Ltd to BUY (in Nov 2011), the stock has jumped by a massive 63%. Previously, we argued that the stock, although undervalued, suffers from a lack of market attention due to its small size and short listing history. With the recent surge in trading volume, there could be further upside ahead arising from a possible market re-rating. However, due to the nature of its business, its earnings streams are likely to remain lumpy. Maintain BUY with an unchanged S$0.71 fair value estimate.

Runaway train
Since we upgraded our rating for UE E&C Ltd to BUY (in Nov 2011), the stock has jumped by a massive 63%. Previously, we argued that the stock, although undervalued, suffers from a lack of market attention due to its small size and short listing history. With the recent surge in trading volume, there could be further upside ahead arising from a possible market re-rating.

New name, old hand
UE E&C was incorporated in 2010 and listed on SGX in 2011, following a spin-off from its parent company, United Engineers Limited (UEL). Its track record, however, can be traced back to Greathearth Construction, founded in 1981 by current CEO Mr. Chua Hock Tong. With more than 30 years of track record in construction, UE E&C is a reputable name in the industry. More importantly, the long track record is a strong testament to the group’s ability to navigate through the past construction cycles.

Undervalued, but caveats apply…
Excluding the net cash holdings of S$104m, UE E&C’s shares appear to be undervalued at ex-cash PER of just 2-3x. However, investors need to be aware of several salient points. First, as a construction-cum-developer, the group’s financial performance can be very lumpy. Secondly, the 6 S cents dividend for FY11 may not be repeated. Thirdly, market talks surrounding a possible sale by UE E&C’s parent may just fizzle out.

Buy for the right reasons
We like UE E&C and urge investors to buy for the right reasons. Earnings could remain bumpy due to the lack of property development gains in FY12-13, unlike in FY11. The next catalyst may come only in FY14 from the completion of Austville Residences. Maintain BUY with unchanged S$0.71 fair value.