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Is United Engineers Limited’s Decision To Sell UE E&C Ltd A Good Move For Its Investors?

Last week, United Engineers Limited (SGX: U04) has agreed to sell its 68.2% stake in its subsidiary, UE E&C Ltd  (SGX: NI3), to private equity firm Southern Capital Group for S$1.25 per share. The deal is subjected to approval from United Engineers’ shareholders, amongst other conditions.

This news came amidst talks between Thai billionaire Mr. Charoen Sirivadhanabhakdi, who’s chairman of Thai Beverage Public Company Limited (SGX: Y92), and major shareholders of United Engineers. Both groups are discussing a possible transaction involving shares of United Engineers with the latter group looking to sell their stakes in the company.

The sale of UE E&C

The sale of its stake in UE E&C would see United Engineers receive approximately S$230.2 million in cash.

It is interesting to note that the deal United Engineers struck with Southern Capital pegs the entire UE E&C to be worth S$337.5 million. Based on UE E&C’s latest financials for the last 12 months, the company had earned S$58.9 million in profit and generated S$47.8 million in free cash flow – these figures gives UE E&C a price/earnings and price/free cash flow ratio of 5.7 and 7.1 respectively.

With UE E&C’s low valuation and its strong profitability and track record (the subsidiary also had a net-cash position of S$130 million on its balance sheet as of 30 June 2014), it would seem – at least on the surface – that Southern Capital has managed to snag UE E&C for a rather cheap price. Also, UE E&C contributes close to 50% of United Engineers’ profit. Given these factors, why is United Engineers selling its stake in UE E&C?

Some possible reasons

From the sale announcement, United Engineers stated the following:

“ The Proposed Disposal is in line with the Company’s ongoing strategic review and objective of streamlining activities and businesses across the Group. The Proposed Disposal unlocks value for the Company’s shareholders and increases the overall financial capacity and flexibility of the Group so as to enable the Company to strengthen and grow its other strategic business units.

The net proceeds from the Proposed Disposal are intended to be used to repay external borrowings and as general working capital of the Group. This would further strengthen the Group’s balance sheet and enhance the Group’s financial flexibility.”

Based on United Engineers’ latest balance sheet covering the quarter ended 30 June 2014, the company has a net-debt position of S$1.99 billion and a high net-debt to equity ratio of 84.5%. It thus seem that United Engineers might benefit from the sale by using the cash to pare down its debt, especially given the slowdown in the real estate market in Singapore (an important market for the company).

In addition, United Engineers might feel that UE E&C’s industry is at a peak now and it is thus a good time to realize its investment in the subsidiary.

Foolish Bottom Line

However, is it really wise for United Engineers to give up a highly profitable and cash generative business to lighten its debt load and save other less profitable businesses? Shareholders of both United Engineers and UE E&C might need to be patient to see if the sale is Foolish or foolish in the end.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any company mentioned above