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United Engineers - Milking mixed development
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Publish date: Fri, 09 Dec 2011, 11:59 AM
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"UE BizHub East will be the focal point of activities within the vicinity when it opens in the first quarter of 2012." - David Liew, Managing Director.
Balance sheet has been boosted by development properties, with mixed developments at one-north and UE BizHub East also contributing soon. In any softening of the property market, United Engineers should be well-placed to make acquisitions.
We factor in less bearish assumptions for mixed developments, offest by lower ASPs for its Bendemeer site, resulting in +2%/-30% EPS adjustments, and a slightly higher RNAV and target price (still at 45% disc to RNAV). Maintain Outperform.
Balance sheet ideal for acquisitions
We expect stronger operating cash flows in 2012/13 with recurring income from the one-north mixed development and UE BizHub East. Cash flows should be further boosted by proceeds from completion of The Rochester residential development.
With operating cash balances more than sufficient to meet capex requirements, net gearing is estimated to drop to 0.4x (from 0.5-0.7x in 2008/09). This leaves ample room for acquisitions to 2008's net gearing of 0.7x and management's target of 1x, with a S$500m MTN programme as an available funding facility.
Mixed development as resilient assets
We expect earnings from mixed developments to be rather resilient. Rents at UE Square had been less volatile in 2008/09 with occupancy staying consistently close to 100%. Given their non-prime locations, we expect affortable rental rates and similar profiles for upcoming mixed developments. The Rochester Mall has been almost 100% leased.
Undemanding valuations
The market is pricing in an additional 9-11% drop in asset values, in our estimation. This compares with an implied 1.5% drop in RNAV if current asset values are pegged to 2009 levels. With its balance sheet stronger in this cycle than in 2009, and earnings from more cash-generative assets, we believe such valuations are unwarranted.
Don't rule out special dividends as 2012 is UE's 100th anniversay, with cash flows benefiting from Rochester (Picture left) sales proceeds. Special dividends could lift its dividend yields beyond 5%. (Read full report)
Source : CIMB Research
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