Federal and UE - laggards that merit a second look


EVER since the end of the General Election in early May and the advent of US inflation-cum-interest rate worries shortly thereafter, interest in local stocks has become highly selective. Instead of the market-wide push experienced during most of the latter half of last year and the first quarter of 2006, investors appear to be recognising that market risks have increased and as such, have now become more discerning in their choices.

As a result, second-line focus over the past three months has largely alternated between China stocks and technology, perhaps understandably so since both areas enjoy abundant liquidity and there is no shortage of analyst coverage.

In recent days, however, there are signs that interest may be switching to laggard sectors or stocks neglected for many months - on Monday, for example, the shipping and property sectors took off for no apparent reason. If attention continues to shift in this way, what areas might come into play?

Oil and gas

One possibility is oil and gas. Despite record high oil prices - and the possibility of even higher prices before year-end - the sector was earlier this year in play but lately seems to have dropped off the radar screen of most investors.

Or to be more accurate, when looking at the oil and gas sector, most of the attention has centred on well-known names such as Keppel (when it comes to blue chips) and Ezra Holdings or KS Energy (when it comes to second-liners).

An interesting alternative, however, insofar as the second line is concerned, is the Indonesian-linked Federal International, which is involved in engineering, procurement and construction activities for the energy and infrastructure industries, and recently won a 10-year contract in Indonesia. Last week, Federal announced its profit for the six months ended June 30 rose by almost 150 per cent to $6.2 million, on a 59 per cent rise in turnover to $59 million.

Assuming the second half is at least as profitable, Federal's forecast full-year earnings per share works out to around six cents. At a current price of 50 cents, the stock's valuation is a relatively modest eight times earnings, certainly not overly demanding against the double-digit multiples others in the sector are selling for.

Moreover, the counter has corrected sharply from its 2006 high - down almost 36 per cent since touching 76 cents in February, so upside potential is clearly present.

Another sector which has faded from the scene in recent months but could come into play if the laggard focus continues is property and construction. Just as it is with oil and gas, the tendency has been to stay with familiar names; but just like oil and gas, there are interesting, lesser-known alternatives that could merit a second look.

United Engineers, for example, is a case in point. One of the oldest companies listed here, UE on Monday announced a 24 per cent increase in first-half turnover to $283 million, compared with last year. If a one-time gain of $40 million is excluded from last year's figures, UE's profit after tax from continuing operations for the first half of 2006 is up sharply from $1.3 million to $20.2 million.

Property and construction

Property-cum-construction companies are sometimes valued according to their net asset values (NAV) and on this front, UE measures up favourably - its NAV as of June 30 was $2.91. At $1.81, the stock, therefore, trades at a 38 per cent discount to its NAV in a market where other property/construction counters are trading at a premium.

Like dozens of other second liners, Federal and UE's shares have been largely neglected because of low analyst coverage. This, in turn, has affected liquidity, which then sets in motion a vicious circle of lowered interest, reduced analyst coverage, depressed share prices, and so forth. Still, this should not detract from the obvious improvement in fundamentals and hopefully, shareholders who exercise the necessary patience will eventually be rewarded.

《The Business Times》


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