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).