Finding value amidst small-mid cap turmoil. Despite its outperformance this year with a 59.8% YTD return versus peers of 11.5%, UE E&C is still trading at dirt cheap valuation of 1.9x ex-cash P/E. It has consistently outperformed other construction peers who have also ventured into property development, with strong ROEs and a consistent dividend payout since listing in 2011.

Strong pipeline of projects from parent company. UE E&C is an A1 main contractor with M&E expertise, as well as power solution operations encompassing two power plant projects in the Philippines and Indonesia. Unlike other contractors, UE E&C is ensured a steady stream of construction contracts from its parent company, United Engineers, who is also the largest shareholder with a 68.2% stake.

Positioning as an EC suitor. UE E&C has repositioned itself as an ideal Executive Condominium contractor to partner with. It promises a fixed construction cost, and often takes equity stakes in the project. UE E&C holds a 30% stake in two ECs, Watercolours and Austville Residences, which have been fully sold and will receive TOP in FY14. We expect UE E&C could book in SGD26m of earnings. UE E&C recently launched EC Waterwoods in Punggol with bookings expected to close in November. We estimate UE E&C can book in SGD15m for this project separately in FY16, assuming ASP of SGD790psf.

Construction orderbook with room for growth. UE E&C holds a construction orderbook of SGD650m consistent with its past 3 year historical average of SGD595m. This excludes the construction contract from their 80/20 JV stake with Wing Tai in Prince Charles Crescent which they are likely to obtain in future.

Bumper dividends up ahead. UE E&C is trading at 5.4x historical P/E, or ex-cash of 1.9x P/E. Assuming flat construction earnings and a stable 27% dividend payout the same as FY11 and FY12, we roughly estimate UE E&C could pay up to 6-7 cents in FY14 (versus FY12’s 5 cents), which translates to a 6.3-7% yield. We note UE E&C has paid up to 6 cents previously when it initially listed due to bumper earnings from project completions.  

Source: Maybank Research - 22 Oct 2013