After reading United Engineers Limited’s (SGX:U04) most recent earnings announcement (30 June 2018), I found it useful to look back at how the company has performed in the past and compare this against the latest numbers. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is a crucial aspect. Below is a brief commentary on my key takeaways.
Was U04’s recent earnings decline worse than the long-term trend and the industry?U04’s trailing twelve-month earnings (from 30 June 2018) of S$55.4m has declined by -8.7% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -24.2%, indicating the rate at which U04 is growing has slowed down. Why could this be happening? Well, let’s look at what’s transpiring with margins and whether the entire industry is experiencing the hit as well.
Although revenue growth over the past couple of years, has been negative, earnings growth has been falling by even more, suggesting that United Engineers has been increasing its expenses. This hurts margins and earnings, and is not a sustainable practice. Viewing growth from a sector-level, the SG real estate industry has been growing its average earnings by double-digit 33.8% over the prior year, . This is a turnaround from a volatile drop of -2.4% in the previous few years. This growth is a median of profitable companies of 24 Real Estate companies in SG including Yoma Strategic Holdings, Hong Lai Huat Group and GSH. This shows that, in the recent industry expansion, United Engineers has not been able to realize the gains unlike its average peer.In terms of returns from investment, United Engineers has fallen short of achieving a 20% return on equity (ROE), recording 2.6% instead. Furthermore, its return on assets (ROA) of 2.2% is below the SG Real Estate industry of 3.7%, indicating United Engineers’s are utilized less efficiently. However, its return on capital (ROC), which also accounts for United Engineers’s debt level, has increased over the past 3 years from 1.1% to 2.4%. This correlates with a decrease in debt holding, with debt-to-equity ratio declining from 164% to 37.3% over the past 5 years.
What does this mean?
Though United Engineers’s past data is helpful, it is only one aspect of my investment thesis. Usually companies that face a drawn out period of decline in earnings are going through some sort of reinvestment phase in order to keep up with the recent industry disruption and growth. I recommend you continue to research United Engineers to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for U04’s future growth? Take a look at our free research report of analyst consensus for U04’s outlook.
- Financial Health: Are U04’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2018. This may not be consistent with full year annual report figures.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.