SINGAPORE (May 8): CGS-CIMB Securities is retaining United Engineers at “add” given an operationally stronger 1Q18, lower losses in China and higher engineering & distribution contribution.
UE reported a 1% y-o-y decline in 1Q18 revenue to $105.2 million but earnings improved 3% y-o-y to $9 million, thanks to lower distribution and other costs due to divestment of its liquefied petroleum gas (LPG) business at end 2017, lower interest expense and slight 1.4 ppt improvement in gross margins to 43.5%.
See: United Engineers posts 1Q earnings increase by 3% to $9.0 mil on lower costs
As 1Q18 EPS of 1.4 cents came in above CGS-CIMB’s expectations at 38.3% of full-year forecast, the research house is leaving its FY18-20 earnings estimates unchanged.
“We maintain our RNAV of $3.46 and target price of $2.94, pegged at 15% discount to RNAV. UE is trading at 23% discount to RNAV,” says analyst Lock Mun Yee.
During the quarter, property-related activities performed better y-o-y. As expected, property rental and hospitality operating profit fell 5% y-o-y on lower occupancy at UE Bizhub West with the departure of HP last year although this was offset by lower losses from property development activities with sales of completed units at Chengdu Orchard Villa.
UE’s manufacturing activities, however, continued to feel the adverse impact from the end-of-life of certain existing precision engineering manufacturing programmes but this was partly offset by higher contribution from its systems integration business and higher margins from its engineering and distribution operations.
UE plans to embark on asset enhancements initiatives (AEI) for its investment properties in Singapore, such as UE Bizhub City. This could include increasing property utilisation or optimising the size and use of its hospitality assets, in our view.
Management also indicated that it may look for selective acquisitions when the opportunity arises. The former activities should enable the group to improve its property performance and boost RNAV in the medium term.
“Potential re-rating catalysts could emerge from realising low-hanging fruits from any asset enhancements at its properties, which we have not factored into our current RNAV. Downside risks could come from execution delays,” says Lock.
As at 10.56am, shares in UE are trading 2 cents higher at $2.69 or about 67 times FY18 forecast earnings.
