Tee International

OCBC Investment Research on 20 March 2013

TEE International recently announced the establishment of two wholly owned indirect subsidiaries, Tee Industrial Pte Ltd and Tee Hospitality Pte Ltd, under its real estate unit, Tee Land Pte Ltd. The principal activity of both subsidiaries will be in real estate development. The choice of names suggests that the group is preparing to expand its property business further, into the industrial and hospitality services segments. Tee's management had previously shown a willingness to move into new markets or business lines; witness its venture into Thailand's wastewater treatment industry in 2011.

Last November, the firm also said it was exploring a possible entry into Myanmar's cement industry through a joint venture with Ayeyarwaddy Cement, though the deal is still pending the results of technical studies of the project, to be completed by June 8. We are neutral on the latest announcements, which are short on details, but we expect more updates soon.

Meanwhile, a Tee executive we spoke to this week said that the group's plan to spin off its property business remains on track for an SGX listing by May. We expect more updates on the plan's progress in the coming weeks.

Tee's share price has drifted lower since going ex-dividend on March 6 and is currently near our fair value estimate, but we expect its share price to remain supported in the near term by expectations of a special dividend if its spin-off plan succeeds. We maintain our fair value estimate of S$0.30, based on 5.5x FY13 forecast earnings for its main engineering business (which still accounts for about 90 per cent of Tee's revenue), and our "hold" rating on the stock.

We have not factored in any potential gains from the spin-off in our valuation model and we prefer to remain cautious on Tee until we see stronger contributions from its real estate business, after its weak Q2 FY13 results.

HOLD