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OCBC considering sale of United Engineers Ltd

BullionStar

OCBC started the year with a bang by announcing that it is considering the sale of United Engineers Ltd (again). Two years ago, the local bank had tried to divest United Engineers (UEL) but the deal did not materialize.

On 7 January 2017, OCBC and its subsidiary, Great Eastern Holding (GEH), appointed Credit Suisse (Singapore) Limited as their financial adviser in connection with the strategic review encompassing the whole of the combined stakes of OCBC Bank and GEH in UEL and WBL.

Both OCBC and GEH hold about 30% of UEL. If the move is successful, it will be a windfall for OCBC as the market capitalization of United Engineers is about $1.7 billion. In view of this, investors immediately bought into the news and chased OCBC share price to nine month high of $9.38.

Singapore finance blog

I believe this time round, the sale of UEL is imminent as the company had been disposing its assets for the past nine months. This included the 42.2% effective interest in Multi-Fineline Electronix, Inc. (MFLEX); 62.6% effective interest in Suzhou Speedling Co., Ltd.; 100% interest in UES Holdings Pte. Ltd.and its subsidiaries and associates; 100% interest in UE Envirotech Pte. Ltd. and its subsidiaries; 100% interest in UE Asia Pacific (Beijing) Co., Ltd. and its subsidiary; and 100% interest in Hengyang City UE Songmu Water Co., Ltd.

So it is a right move by OCBC to dispose its stake in United Engineers? Well it’s a tough call because while the property developer and engineering firm is facing headwinds in the sluggish property market, it is still making healthy profits. Net profits for continuing operations was $31 million for Q3 2016, a decrease of 16% compared to last year.

Balance sheet was fairly sound except that long-term borrowings of $897 million may weigh on the company’s growth. Total current assets was $1.6 billion while total liabilities was $1.66 billion. Net borrowings decreased by $377 million mainly due to repayment of external bank borrowings. As a result, the Group’s net debt to equity ratio improved from 0.49 times to 0.28 times.

At $2.75, the share price of UEL is currently being traded at level below its Net Asset Value( NAV). Cash flow was good with net cash from operations at $241 million for the nine months ended.

As a well-established property developer with 100 years of history in Singapore, UEL is affected by the Qualifying Certificate regulation. Thus, this may be the motivation for OCBC to sell its stake because the bank may want to avoid paying hefty Qualifying Certificate penalties for unsold property units of UEL. A slew of property developers, like Keppel Land, Sim Lian and Popular, had delisted from SGX to avoid paying the charges.

One of the reasons why Singaporean investors love to invest in OCBC shares is because the bank has billion dollars worth of hidden value. In the latest financial results, OCBC revealed $6.31 billion worth of unrealized valuation surplus for its investment properties and equity stakes in subsidiaries. To be specific, valuation surplus represents the difference between the carrying value in these properties and investments in the subsidiaries, and the market values of those properties and investments in the subsidiaries.

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From my point of view, OCBC will continue to sell its non-core assets to unlock value for shareholders and the sale of UEL is ripe. However, given its substantial warchest of hidden value, OCBC is in no hurry to sell and it is also unlikely that the sale will be cheap. If materialized, the sale would have a positive impact and potentially turbo-charged OCBC share price to $10.

Not vested in this counter but is monitoring this counter very closely.

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Trade With The Whale

Trade With The Whale
Updated: January 21, 2017 — 4:43 pm

5 Comments

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  1. Hi,

    UE is only 1.76B market cap. OCBC has maybe at max 30% due to indirect stake from Great Eastern or other vehicles.

    30% of 1.76B = 520MM.

    OCBC is 39B market cap. 520MM/39B = 1.3%.

    How to turbo charge to 10/9.3 = 7%

    Possible to explain how you derive the figure of 10 dollars.

  2. Hi blancfable,

    You have determined a rough market value of OCBC after incorporating the sale transaction of UE. And I don’t dispute that.
    But market price is a different ball game altogether as its driven by investors’ sentiments.
    Most investors would tend to buy into good news and drive up the share price of OCBC.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  3. Hi Gerald,

    Does it make sense to sell a 1.3% of a company market capitalisation which is so small to call it a 7% upside and is turbocharged? Is it a bit over optimistic?

    So is it possible that companies selling their a very small subsidiary will get a magnified return? If so, kindly provide any examples to substantiate your points?

    Thanks

  4. Hi Gerald,

    Just looking for some rough valuation only.

    OCBC only owns 4+% of UE, while GEH owns 13+% of UE. How do we get 30% of UE quoted above? added Lee foundation share?

    Also the $6.3b of unrealised valuation surplus, what % of it relates to UE? Hard to determine that as they do not give the breakdown. My guess will be 300m may be for UE only.

    OCBC trading 1x P/B and GE trading 1.5x P/B, while OCBC paid 1.9x P/B for Wing Hang Bank. UE is trading 0.92x P/B. What is the fair price that OCBC & GEH will dispose? 1.3x? That will equate to paying $3.9 for UE (highli unlikely)

    You mentioned Qualifying Certificate regulation. This i believe is for Singapore Residential market only. Looked throught UE portfolio, I think only one property is affected ie Eight Riversuites. The rest of UE portfolio are either Retail, Hospitality or Commercial.

    Thanks

  5. Hi YCT,

    OCBC share price is reaching $10 soon.
    As I mentioned before, price is what you pay and value is what you get.
    I don’t disagree with your valuation of OCBC and UE but market price is always inflated whenever there are good news.
    This is the greed of man and you need to factor that in when investing.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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