Here’s why TEE International’s shares remain firm amid 32.9% drop in profits

It's eyeing more projects from these Asian peers.

According to OCBC Investment Research, TEE International’s share price has remained firm since its weak 2QFY13 earnings report on 8 Jan, trading in a range of S$0.365-S$0.425. OCBC believes that TEE’s share price has been supported by recent strong interest in Singapore construction stocks generally, boosted by the government’s latest projections for construction demand and population growth, both of which should benefit the construction sector.

"To recap, TEE announced a 32.9% YoY drop in net profit to S$2.5m for the three months to 30 Nov, due mainly to a sharp fall in associates’ contributions and higher tax expenses."

Here's more:

The latest government projections for construction demand in Singapore (S$26b-S$32b in 2013 and S$20b-S$28b a year in 2014-15, according to the Building and Construction Authority on 16 Jan) offer reassurance of a steady pipeline of potential projects for TEE’s main engineering business (~90% of its revenue).

Meanwhile, the government’s promises to step up spending on infrastructure to prepare for a population of as many as 6.9m people by 2030 suggests that construction demand here will remain strong well beyond the next three years.

TEE is also trying to secure more regional projects for its engineering business, in markets such as Brunei, the Philippines, Macau and Myanmar, to diversify its sources of revenue.

We raise our valuation of TEE’s main engineering business to 5.5x FY13 forecast earnings from 5x previously, to reflect the improved long-term outlook for its engineering segment. This raises our overall fair value estimate for TEE to S$0.30, from S$0.28.

We have not factored in any potential gains from its planned spin off of its real estate business (TEE is targeting an IPO by May) and given its weak 2QFY13 showing, we prefer to remain cautious on the stock until we see stronger contributions from its real estate business. We maintain our HOLD rating on TEE.

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