The fight for gold on Chinese ground. United Engineers has thrown in its bid envelope for WBL and sets the stage up for a counter response from Straits Trading Company as the former’s offer is significantly more aggressive than the latter’s. Even at SGD4.00 however, there could be upside for WBL as our rough table napkin calculation shows a potential SGD5.04-5.59 SOTP value for WBL. Financially, it would appear that STC is better placed than UE to pay more for WBL. Regardless of how things turn out however, OCBC is definitely playing a more aggressive role in unlocking the value of its non-core assets, as originally speculated by us. After a stellar run, UE may consolidate for now until the saga completes but the stock remains a BUY with a long term TP of SGD4.02.

United Engineers takes on Straits Trading for WBL prize. United Engineers has launched a takeover for WBL for SGD4.00 a share, higher by 19% than Straits Trading’s (STC) competing cash offer of SGD3.36/share and 15% above WBL’s book value of SGD3.48. UE is bidding in concert with OCBC, Great Eastern, and Lee Foundation. Together, they own 39% of shares including convertible bonds. UE also specifically highlighted that UE shareholders will still receive a final dividend SGD0.05 a share from WBL, unlike STC’s cash offer which does not include this dividend.

So how much is WBL really worth? The biggest question the market is probably asking now is what could WBL be worth? It is not covered by any broker in the market given its illiquidity and tight float, but it has been known for many years now that its claim to fame is a highly valuable China property portfolio acquired many years ago, and is still held at cost in its books. These property assets include properties under development, raw landbank as well as investment commercial properties in Sichuan and Liaoning provinces as well as Suzhou and Shanghai. Our rough back-of-the-envelope calculation for WBL’s SOTP value ranges from SGD5.04 a share to SGD5.59.

Could Straits Trading counterbid? The second biggest question is would there be a counterbid by STC? STC’s Chairman Chew Gek Khim, the granddaughter of ex-OCBC Chairman Tan Chin Tuan, certainly has shown her determination in wanting to take WBL, going to the extent of teaming up with two long-term funds to wrest control of 43% of WBL. Financially, it possibly has the capacity to raise its offer. Assuming it raises its bid to WBL’s pre-halt price of SGD4.20, STC’s net gearing of 0.44x will rise to 1.14x, which would still be lower than the 1.80x level that UE’s net gearing will rise to if it succeeds with a SGD4.00 offer.

OCBC shows its value-unlocking hand. After a stellar run since we initiated coverage in Dec 2012, UE’s share price may start to consolidate in the short term until the bid is over and the winner is known. In the long run however, this confirms our view that UE is shaking off its former dowdy image and turning more rowdy in raising shareholder value with OCBC’s aid. If it wins WBL, it would have the added allure of the China property angle despite a spike in gearing, and even it does not succeed, OCBC will continue to unveil its value-unlocking hand.

Source: Maybank Kim Eng Research - 31 Jan 2013