United Engineers

CIMB Research on June 10

UNITED Engineers (UE) now has new business segments in the form of WBL. While some are unrelated to its core expertise, there are others that could be good fits. The wildcard is UE's execution ability in growing its auto and China property units and rationalising its non-core assets. We stay "neutral" for now, with UE trading at 0.7 times P/B, in line with historical average.

In this note, we explore the positives and negatives of UE's acquisition. We tweak FY2013-15 core EPS on higher occupancies and lift our target price to S$3.02 on a narrower 40 per cent RNAV discount (versus 45 per cent before) as we turn slightly more comfortable with WBL's inclusion.

Success in growing the auto and property units and rationalising non-core assets could be catalysts.

With the acquisition of a further 55.97 per cent stake in WBL and S$6.9 million in principal amount of convertible bonds, UE has to fork out an acquisition price totalling an estimated S$716 million. Assuming that this is 75 per cent debt-funded, UE will have to raise an additional S$537 million debt - increasing its pro-forma net gearing to 105 per cent from FY2012's 83 per cent, the highest among Singapore peers.

In our view, the negative impact on net gearing can be reduced by the divestment of WBL's technology segment - its 62 per cent stake in MFLEX and 77 per cent stake in MFS Technology. It is something UE is exploring.

Management had hinted at potential interests from various undisclosed parties.

We estimate proceeds of about S$491 million if this segment is divested, which could improve UE's balance sheet post-acquisition, result in a cleaner corporate structure and potentially lower its conglomerate valuation discount.

WBL's automotive unit has registered strong growth in the last three years; the business is expected to provide stable recurring income for UE.

Another key segment for WBL is its China property landbank (mixed and residential projects) acquired early in the cycle.

Although details are sketchy at the moment, our preliminary estimates show that the potential gross development value of the land could lift RNAV by S$0.32-S$1.28 a share. Execution is the wildcard, given the group's limited operational expertise in China.

We believe UE would need to show some tangible results before the market can reward the stock for its WBL acquisition.

NEUTRAL