United Engineering worries over a gloomy 2012

Investment properties' $3.96/share value is disappointing.

According to Maybank Kim Eng, UEL’s investment properties are undervalued, having a net asset value of SGD3.96/share as of 3Q12.

Here's more from Maybank Kim Eng:

Its headquarters, UE BizHub Central, is currently held as a fixed asset at cost. We estimate the surplus from this one property alone based on its market value is worth SGD130m, or SGD0.40/share.

In addition, more can be done, in our view. For example, existing investment properties can be redeveloped to take advantage of current buoyant market conditions.

Time ripe to redevelop UE Square? Built in 1997, UE Square is the oldest mixed property in UEL’s portfolio of property investment assets.

With a Downtown MRT station being built right across the road from the property, a redevelopment plan to maximise its commercial and retail space will certainly be in UEL’s favour.

A full-fledged redevelopment of the commercial and retail elements could go a long way to maximising the value of this property and add SGD0.34/share to our RNAV.

Hospitality assets could be sold. UEL is still in the early stages of growing its hospitality business, from 708 keys currently to 3,000 keys in the next 3-5 years. We value their hospitality assets under the Park Avenue brand name at SGD360.5m or SGD1.10/share, which may attract the attention of the most aggressive buyer of hospitality assets in the market now, the Far East Group.

We believe UEL’s 4-star hospitality assets are a good fit for Far East’s ambitions in this area. Property earnings kicking in next year. 2012 is not expected to be a good year in contrast to 2011’s bumper harvest.

However, this is due to no revenue recognition for property development. With 8 Riversuites, a 862-unit 99-year condominium already 43% presold since launch in Sep 2012 and the completion of the prime orchardgateway mall in Orchard Road, we expect 2013 to start showing a recovery.

This will be followed by the completion of Sengkang Mall and Austville EC in 2014, and Watercolours EC in 2015. Deeply undervalued diamond. On book value alone, UEL is worth SGD3.96/share.

But this figure is still understated as it excludes assets like UE BizHub Central which alone is worth SGD0.40/share. We value UEL’s group RNAV (after debt) at SGD5.30/share.