United Engineers (S$3.91) - 1QFY08 results - Hit by one-offs; core numbers in line Core numbers in line. Core net profit of S$12.1m forms only 9% our full-year forecast and 11% of consensus. However, the numbers are within our expectations as we had anticipated lower profit recognition from The Rochester (95% sold at ASPs of S$1,350psf), which is still in the foundation phase.
Barring delays, management has guided that 30% of presale profits from this project will be recognised in FY08. This is in line with our expectations. We expect the project to yield over S$210m in pretax profits. Hit by one-offs but operating figures continued to improve. Headline earnings in 1Q08 were hit by fair-value losses of S$2.9m from short-term investments (Yongnam shares) and an S$8m carrying-value write-down relating to the disposal of a non-core asset (Anhui Hefei United Power).
Stripping these out, revenue grew 9% yoy to S$133.6m despite marginal recognition of The Rochester. Gross margins improved by 2.2% pts yoy to 21.4% on higher rental rates from UE Square. Net gearing of 0.7x was moderately high but is expected to improve to 0.5x in 2009 once profits from The Rochester come on stream.
Construction order book maintained at S$1bn; Centric its next major project. UE maintains a rolling order book of S$1.1bn. Given the demand for construction work in Singapore, the order-book uptrend should be sustainable for the next 2-3 years. UE also continues to be a key proxy for emerging hubs in Singapore. Centric, a business hub project at the Changi Business Park due for completion in 2011, will be developed by the group. While details are still sketchy, its gross development value is expected to be in the region of S$280m-300m. We have not incorporated this in our model.
Continues to offer value. We have reduced our FY08-10 earnings estimates by 5-9% to factor in lower contributions from associates. Our end-CY08 RNAV has been trimmed by 2% from S$6.04 to S$5.94 to factor in an estimated loss of S$30m from the disposal of its non-core asset. Our target price, still pegged at a 20% discount to RNAV, is consequently lowered to S$4.75 from S$4.84. The possibility of monetising UE Square remains a nearterm catalyst for the stock while further clarity on the development of Centric at Changi Business Hub leaves scope for valuation expansion. Maintain Outperform.