Friday, April 20, 2012

UE E&C

Posted this to remind myself. I wrote this in mid 2011 at compelling price levels but was not comfortable with the non-niche business segments and cyclical construction industry and hence did not take up a position in this. Seems like I was sorely wrong on this...

Took me a while to comb through new firms and old in Asia and after much consideration, I have decided to write on this interesting company.



Background 
  • One of Singapore's established engineering and construction player with 30 years of operations.
  • Spun off from UE in 2010 at $0.48/sh, 70 mm shares offered on top of UE holding 200mm. With 60mm placement and 10mm via public.
  • Firm being related to UE is naturally related to the Straits Trading / OCBC empire (note common directors)
  • Business units (revenue %)
    • Construction - 85% Bulk of the business, fluctuating and thin 2-5% ebit margins
    • Engineering (mech and electrical) - 8.2% Decent small business with 10-15% ebit margins 
    • Building materials & equipment - 6.8% Small but profitable with 20+% ebit margins
Investment Thesis
  • BCA (Building Authority) expects S$22-28 bn of public constructions and 7-9b in 2010 for private sector.
  • Firm enjoys a position of being related to both public and private segments.
  • Simply a statistical play, Mr. market is paying me S$20mm to buy a firm for free. 
Financials


  • Trading at S$ 0.37 per sh with 270 shares in total or approx S$100mm in mkt cap
  • Despite being in the construction/ ppty field, it has mostly generated cash flows which is a big plus 
  • Firm had a bumper year in 2008 -09 due to ION Orchard, Marina Bay Sands and several other mega projects which is unlikely to happen in the near future. So earnings of S$40mm in 2009 will probably revert to 2007 levels or slightly over at around 7-10mm range.

Risks 

  • Slowdown in ppty sector (likely but not significant for 2011). 1H 2011 rev down 13+% and profit down 7+% 
  • Negative margins for constructions and engineering, likely for construction (biggest revenue contributor).
  • Firm suffering cash burn in future (historically leveraged to be involved in ppty devt and construction).
  • Only 70mm out of 270mm shs are floated of which  60mm is in the hands of institutions, some of which if you check are known long term holders like 2G capital.
  • Firm did mention no dividends promised in the prospectus and I believe may be valid since the entire sector is slowing and that firm has historically been in a negative working capital situation. May not be a bad thing since it may hint at stronger bargaining power to have faster current asset turnaround versus their liabilities.

Expectations 

  • I would expect to pay above net cash and securities value of S$120mm. (Downside is capped)
  • On top of that, I will pay around 5x owners earnings on a worst basis, about S$4-9mm = S$20-45mm.
  • So total value will be approx S$ 140 - 165mm or 40-65% upside from current levels.
  • However if you look at it, it is one of the dominant players in both construction and engineering with above average margins. If you pay 10x, that's equivalent to S$160 - 210mm or 60 -110% upside.

Disclosure: Author does not own a stake in the firm described above.

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