UEM Builders

UEMB net profit of MYR157.4 mln in 2007 was lifted by a net gain of MYR90.4 mln arising from dilution in its equity stake in UK-listed Costain Group Plc (COST LN, GBP0.245, Not Ranked). Excluding this one-off gain, the net profit was MYR67.0 mln. We project stronger net profits of MYR89.4 mln and MYR111.8 mln in 2008 and 2009 respectively as the construction of the MYR4.3 bln Second Penang Bridge (P2X) gains momentum. At present, UEMB has a reasonably strong outstanding order book of MYR 3.5 bln and is likely to secure the MYR1.2 bln Cikampek-Palimanan Highway project in Indonesia soon. In addition, the construction margin is expected to improve as the new contracts would have incorporated increases in prices of raw materials.

UEMB is also expected to continue to derive stable earnings stream from its infrastructure maintenance business and Penang Bridge concession. We also expect 20.55%-owned Costain to return to profitability in 2008 after making certain write-downs and provisions for closure of its international divisions in 2007. Overall, we forecast the group’s EBIT margin to hover between 11% and 12% in 2008-2009.

Investment Risks
Risks to our recommendation and target price include fewer-than expected new contracts secured, lower-than-expected profit margins for construction projects, potential delay in the Second Penang Bridge and execution risks for overseas construction contracts.

Recommendation
We initiate coverage on UEMB with a Buy recommendation and a 12-month target price of MYR1.50.

We have valued UEMB using the Sum-of-Parts (SOP) method, which comprises four major components: (i) construction business, (ii) Penang Bridge concession, (iii) infrastructure maintenance and (iv) its 20.55% stake in Costain. Our target price also includes projected net DPS of 1.5 sen (2.0 sen gross).

At our target price of MYR1.50, the implied 2009 PER is 12.9x. The PER is at the higher end of our valuation range for small and mid-sized construction companies, which we feel is justified given UEMB’s expanding order book and stable recurring income from its existing Penang Bridge and infrastructure maintenance business. In addition, the recently proposed restricted offer for sale (ROS) by UEM World (UEM MK, MYR3.40, Not Ranked) of its shareholdings in UEMB at an offer price of MYR1.42 should provide share price support, in our view.

From a Corporate Social Responsibility perspective, we note that UEMB has published policies pertaining to the environment, occupational health and safety, emphasizing its commitment to environmental preservation. In addition, UEMB also supports various activities such as charities and human talent development programs which benefit the community.