Tee International: Prospects improving, but looking fairly valued for now

Construction growth to continue this year. TEE International (TEE) should
continue to benefit from the continued growth in the construction industry in
Singapore, through the mechanical and engineering services it provides as
well as its recent venture into property development. Figures released by the
Ministry of Trade and Industry (MTI) showed that the construction sector grew
by 9.7% in 1Q 2007 and MTI expects construction demand to expand 12% this
year. Meanwhile, the number of construction contracts awarded in 2006 grew
40%, according to the Building and Construction Authority, and we expect the
contract pipeline to remain strong in view of the recent en-bloc sales and the
construction of the two massive integrated resorts.
Property development and acquisition strategy. TEE recently acquired
properties at Thomson Road, Cairnhill Circle and Rambai Road. The former
was a freehold land which TEE plans to redevelop into luxury apartments.
Construction is commencing in July 2007 and completion is expected in one
year. Management guided on an approximate profit margin of 18% on the
12,380 sf plot, with a planned launch in Sept 07. The Cairnhill Circle and Rambai
Road sites are residential properties with a collective purchase price of
$15.51m. Management has not confirmed the costing for these 2 properties,
but based on recent transacted prices within the vicinity in the past few months,
margin is likely to be higher at more than 50%, and these projects are likely to
be launched between 4Q07-1H08. We expect the above to boost TEE's
earnings in FY08. TEE expects to fund 90% of these acquisitions through
borrowings, and this would increase its gross gearing to 2.3x in FY08, which
could put a short-term strain on TEE's operating cash flow. TEE is transferring
its development skills from industrial projects to residential projects and is likely
to acquire more development properties in the future.
Outlook remains positive, but share price is fairly valued. We estimate
net profit of S$2.2m for FY08 due to an increase in its order book and sales
from its property developments. We are raising TEE's fair value estimate from
19 cents to 21 cents per dilutive share for FY08, based on 11x PER. As TEE
has already gained 43% since the start of the year and is currently trading
close to our fair value estimate, we downgrade our rating on TEE to a
HOLD.