United Engineers

[Musicwhiz]

It is actually supposed to recognise revenue on a more conservative method. The only issue is that revenue & earnings recognition might be more lumpy now since they can only be recognised once the entire property has been constructed finished.

Actually I've always felt that whichever method was used, whether % of completion or completed contracts, revenue would still be lumpy anyway due to the nature of the business (i.e. construction in stages, progress billings).

[dzwm87]

Okay, this is what I have figured out after reading their 3Q results.

Based on my layman logic (only have basic accounting knowledge ), it seemed that a portion of the surge in sales & earnings are actually figures recognised from earlier quarters.

Because for UE 1Q & 2Q results, this was recognised based on percentage of completion. Hence, upon adoption of INT FRS 115, earnings for 1Q & 2Q are reduced, since the bulk of its sales comes under projects such as Park Central & Rochester which have only obtained its TOP in July.

I don't think this is any financial dressing but perhaps a one-off abnormality in earnings comparison. This happened so for another property developer stock which I am vested in.

I think the main concern however, is the possibility of "lumpier" earnings as they can only be recognised only after construction has been completed. And with lumpier earnings, we all know it can be a tough catalyst to revalue stock price.

Anybody else have other opinions on this?

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It is actually supposed to recognise revenue on a more conservative method. The only issue is that revenue & earnings recognition might be more lumpy now since they can only be recognised once the entire property has been constructed finished.

Actually I've always felt that whichever method was used, whether % of completion or completed contracts, revenue would still be lumpy anyway due to the nature of the business (i.e. construction in stages, progress billings).

Yep, you're right but now with INT FRS 115, it becomes even MORE lumpy - which is in fact becoming a heavier concern - at least for me.

[LionFlyer]

I came to similar conclusions when re-reading the report a few times.

I don't know if this is a good idea. Basically, from the accounting perspective, there would be little revenue during the construction period while there are expenses and liabilities. Then in that one quarter which the property TOP, the orders are computed and booked.

Would interim figures be given to give a sense of the potential revenue? Otherwise, it would be 'lumpy' or sharp increases with periods of moribund figures.

[dzwm87]

Both revenue & COGS will be recorded on completion method.

I think it's only the other cost variables - S,G&A cost - which will be considered as normal across the period.

Not sure about the interim report but the severe lumpiness might be a hindrance to any possible re-valuation to stock price since sharp increases in earnings will not be consistent. Till date, most of these property developers do provide accounts of using %-to-completion method but I'm not sure how many investors actually read that portion.

Was thinking of an opportunity to speak to the management of some of these property developers - to see what they think about it.

[Nick]

Will this new classification mean that the cash-flow will match the income statement more closely ie revenue is only recognized when the development is completed as opposed to paper profit (% of completion method) which is non-cash and hence inaccurate and possibly misleading ?

[freedom]

cash collection has its own schedule to be maintained in project account. e.g. 20% upon signing of agreement. The developers can withdraw money from its project account to carry out construction work, to repay loan and other expense, etc.

whichever the way is, the recognition of revenue does not match its cash flow.

[dzwm87]

freedom is right. Precisely, I think it is the opposite - where cash-flow is now more mismatch against revenue recognition as property buyers still pay according to the %-to-completion method if I am not wrong.

I guess this "conservative" accounting approach towards real estate might ended up making things complicated for investors instead.

[egghead]

My understanding about the FRS 115 is that the revenue/costs recognition depends on the SPA between the developer and buyers. In the case of properties sold under DPS, UE will adopt the COC; and POC for projects under the normal payment by milestones. UE also adopts COC for overseas projects.

[egghead]

I note that property rentals & services recorded an operating profit of $18.7m for 9M11; which annualises to $24.9m. Base on this, and since investment properties are valued at $1,192m, the yield is only just above 2% which is not even half of listed Singapore industrial REIT.

Let me trying to answer part of my own question after studying the AR. The value of investment properties of $1,192 consists of completed properties and those under construction. Property rental is derived mainly from the two completed properties - UE Square and UE BizHub Central which were valued at $665m as at 31-Dec-2010.

[LionFlyer]

CIMB report in Dec 2011.

Mixed development again ah? I am not expert but what is MTN notes and does it increase the gearing?


Vested.