Initiate with BUY and TP of SGD4.18. With an investment property portfolio worth SGD1.7 billion, United Engineers Limited (UEL), a long undervalued company, is on the brink of a major transformation to unlock value. The catalyst for change could come from its major shareholder, OCBC. But we think more can be done to help UEL realise its value. For one, its portfolio of commercial assets, anchored by UE Square, can be redeveloped. Its hospitality assets also could be sold.We initiate coverage on UEL with a BUY rating and target price of SGD4.18, suggesting 43.6% upside from current levels.

Shareholders could push for change. OCBC owns a 24.5% stake in UEL and we believe that it holds the key to UEL’s quest to unlock value. In recent months, OCBC shareholders have given the nod for the sale of the group’s two long-term investments, Fraser & Neave (F&N) and Asia Pacific Breweries (APB). On WBL Corporation, another of its investment, OCBC stood aside in the hope that Straits TradingCompany and its partners could hasten the unlocking of its value. All eyes are now on UEL, the last remaining piece of the OCBC jigsaw.

How UEL can unlock value. The Urban Redevelopment Authority will be reviewing the master plan for Singapore next year, which could mean an increase in plot ratio. We think this offers UEL a unique opportunity to redevelop UE Square, its key commercial asset in the area. In addition, with potential buyers in acquisitive mode, we do not rule out a sale of its hospitality assets – at the right price.

Deeply undervalued diamond. On book value alone, UEL is worth SGD3.96/share. But this figure is still understated as it excludes assets like UE BizHub Central which alone is worth SGD0.40/share. We value UEL’s group RNAV (after debt) at SGD5.30/share. Our target price of SGD4.18 is based on a 25% discount to RNAV. With the current share price reflecting just 54% of the stock’s real worth, UEL is truly a diamond in the rough. Initiate with BUY.

Source: Maybank Kim Eng Research - 17 Dec 2012