M&A Securities M&A UEM BUILDERS BHD. Price: RM1.26 Market Cap.: RM1214.5mn Board: Main Sector: Construction Stock Code: 4855 Recommendation: BUY

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1 M&A Securities M&A KDN: PP/14767/09/2008(010867) 28 July 2008 UEM BUILDERS BHD FTSE Bursa Malaysia EMAS Shariah Index Yes Price: RM1.26 Market Cap.: RM1214.5mn Board: Main Sector: Construction Stock Code: 4855 Recommendation: BUY Key Stock Statistics f EPS (sen) P/E (est) Dividend/Share NTA/Share (sen) Book Value/Share (sen) Issued Capital (mn shares) weeks Share Price Range Major Shareholders: UEM World Lembaga Tabung Haji 5.73 Per Share Data e Book Value (RM) Cash Flow (sen) (30.98) Earnings (sen) (26.84) (2.23) Dividend (sen) Payout Ratio (%) (3.73) (67.38) PER (x) (1.64) (50.76) P/Cash Flow (x) 0.27 (3.65) P/Book Value (x) Dividend Yield (%) ROE (%) (75.80) (4.11) Net Gearing (%) P&L Analysis (RM mn) e Year-end: 31 Dec Revenue Operating Profit (93.53) Depreciation (43.11) (57.31) (60.94) (62.16) Interest Expenses (68.35) (88.72) (98.62) (110.45) Pre-tax Profit (211.28) Effective Tax Rate (22.46) Net Profit (258.75) (21.46) Operating Margin (6.85) Pre-tax Margin (15.48) Net Margin (18.96) (1.19) Investment Highlights Strong outstanding order book of RM3.5bn and is likely to secure the RM1.2bn Cikampek-Palimanan Highway project in Indonesia soon. Continue to derive stable earnings stream from its infrastructure maintenance business and Penang Bridge concession. Construction margin is expected to improve as variation order that will be implemented by the Government under the key Ninth Malaysia Plan (9MP) projects that will reflect increase in raw material cost. 2. Background UEM Builders Bhd (UEMB) is an investment holding company with subsidiaries engaged in the provision of engineering and construction, and infrastructure maintenance and facilities management services in Malaysia. It also engages in the provision of infrastructure, road, and highway maintenance services; chemical waste disposal technology and soil laboratory testing services; housing, building, and infrastructure construction services, as well as in the operation, maintenance, and toll collection of the Penang Bridge. The company was incorporated in 1976 as Acidchem (Malaysia) Sdn Bhd and was listed on Bursa Malaysia in Subsequently changed its name to Intria Bhd, after Mekar Idaman(MISB) injected the Penang Bridge concession into the company. During the 1998 financial crisis, MISB defaulted on its debts and was placed under receivership with Danarharta.

2 In 2000, United Engineers (M) Bhd (UEM) won a bid to acquire a 45% stake in Intria Bhd. Under a UEM group-wide restructuring exercise in 2003, Intria acquired from UEM: (i) Projek Penyelenggaraan Lebuhraya Bhd (PROPEL), (ii) UE Construction Sdn Bhd, a construction company. The company was then renamed UEMB and it became the engineering and construction flagship of the UEM Group. UEMB is the construction arm and 51.7%-owned subsidiary of conglomerate UEM World. Below is the corporate structure of the Group: UEM Construction Engineering & Construction Infrastructure Maintenance UEMBuilder Toll Concession Engineering & Construction 100% 100% 100% 100% 20.55% 100% 100% Source: Annual Report Business Intria Bina Propel Penang Bridge Engineering and Construction Costain Plc Finwares Rangkaian Segar As the largest government linked-contractor, UEMB engages in the provision of project design, management, and contractor services in the fields of civil, electrical, and mechanical engineering, provision of other engineering services and design, supply, and installation of toll and telecommunication systems. Amongst the major projects undertaken are North-South Expressway, North-South Expressway Central Link, Malaysia-Singapore Second Crossing, Kuala Lumpur Light Rail Transit System 2, National Sports Complex & Commonwealth Games Village and Kuala Lumpur International Airport Satellite Building. In 2007, construction generated the bulk of the group s revenue (79%). UEMB currently has an outstanding order book of about RM3.5bn and will last them over the next two to three years. The group's ongoing construction projects include the recently awarded construction of the 2 nd Penang Bridge which should keep it busy until A joint venture formed between UEMB (49%) and China Harbour Engineering Co Ltd (CHEC) (51%), a unit of state-owned China Communications Construction Group (CCCG), is building the 24 km bridge (of which 17 km will be over water) between Batu Maung in the south-eastern part of Penang Island and Batu Kawan in Seberang Perai on the mainland. The cost of the 2 nd Penang Bridge project has escalated to RM4.58bn from the original cost of RM3.6bn due to rising prices of oil and building materials and is to be funded by a US$800mn loan from the Export-Import Bank of China. Other projects include the Penang Bridge Widening, PLUS Third Lane (Rawang to Tanjong Malim), the extension of Institut Jantung Negara and the UEM Group headquarters. Besides this UEMB has formed a consortium with IJM to bid for the RM3.8bn Pahang Selangor Interstate water transfer project. Being part of the UEM group, UEMB is set to benefit from the development Iskandar Development Region (IDR) as the master developer UEM Land is a 71.5%-owned subsidiary of conglomerate UEM World. Nusajaya has been singled-out as the main driver of the IDR is a 24,000 acre integrated development that will comprise residential, commercial, industrial and institutional communities and featuring seven signature developments project. They comprise of the Johor State new Administrative Center (JSNAC), Waterfront Precint, Medical Hub, EduCity, Southern Logistics and Industrial Clusters (SiLC), AdrenaLand and International Destination Resort which will act as catalysts to the integrated development. Penang Bridge Toll Collection In 1993, the group was awarded a 25-year concession to operate and maintain the existing 13.5 km Penang Bridge that connects Gelugor on the Penang Island and Seberang Perai on the mainland. Being the only reliable link between the mainland and the island traffic volume has been rising steadily over the past years generates consistent yearly revenues for UEMB. In 2007, the Penang Bridge generated about 40% of the group s recurring net profit. However, due to traffic congestion on the bridge, UEMB has embarked on a RM570mn road widening works which are currently in progress and scheduled to be completed in the 2H09. Under the spanwidening project, the existing island-bound and Praibound dual carriageway lanes will have an additional 4.8m wide on each lane bringing the total lane from the current 2 to 3 each way. Currently 110,000 vehicles used the bridge daily now and once the additional lanes were completed, the capacity would be increased to 180,000 vehicles. As a result the Government has agreed to grant an extension of the concession period by another 3 years to allow UEMB to recover the additional bridge widening expenditure.

3 Infrastructure Maintenance Projek Penyelenggaraan Lebuhraya Berhad (PROPEL) is the largest highway maintenance company in Malaysia was formed in 1988 with the maintenance of the PLUS North South Expressway in mind. UEMB which has a 100% stake in PROPEL, undertakes repair and maintenance works on highway facilities, such as road works and repair works, cleaning works on lay-bys and rest and service areas and landscaping along expressway areas. Besides the North-South Expressway, PROPEL also maintains Penang Bridge, North-South Expressway Central Link, Malaysia-Singapore Second Crossing and Seremban-Port Dickson Highway. PROPEL which was given the concessions for 50 years (expires in 2038) will assure UEMB of a steady recurring long term income. In 2007, the infrastructure maintenance division contributed about 43% of the group s recurring net profit. Foreign operations UEMB has ventured to the Middle East India and Europe in efforts to improve its earning. In Qatar, the company completed the College of Technology in December 2005, and the 81-km main line Salwa International Highway was operationally completed in time for the 2006 Asian Games in Doha. The Salwa International Highway is still in progress with a remaining value of RM400mn. In India, it has so far projects worth RM900mn, which include several highway projects. The Tumkur- Haveri, Package 2 project is nearing completion and will be handed over soon and the company is in the midst of upgrading and widening a 21.2-km highway in Mumbai worth RM65mn. Recently on a joint-venture basis with Ansal Properties & Infrastructure (Ansal) in India, UEMB is bidding for construction jobs worth RM350mn. UEMB s presence in Europe is via its 20.55% stake in Costain Group Plc. which is an international engineering and construction and land development company. Listed on the London Stock Exchange with a total market capitalisation of 151mn Costain has an estimated order book of 1.6 bn. It provides civil engineering services in water, rail, highways, health, education, retail, nuclear, oil and gas, marine, property, airports and waste. Currently UEMB s overseas revenue stands at 13%, but that should increase when it secures the Cikampek-Palimanan Highway project in Indonesia which is estimated at RM1.2bn, which will add significantly to its present order book. 3. Valuation Comparative Valuation UEMB WCT Gamuda Share Price (RM) Mkt Cap (RM mn) Ave Daily Vol (mn) P/E FY05 (1.64) P/E FY06 (50.76) P/E FY P/NTA (x) Dividend Yield (%) Earnings Outlook Industry Outlook The construction sector remained resilient with a growth of 4.6% in 2007 but is expected to register a much slower or possibly no growth in The current political scenario may also sidetrack the development process while the rebalancing of priorities due to soaring costs of building materials saw several key Ninth Malaysia Plan (9MP) projects being deferred during the mid-term review. Major projects originally in the 9MP but missing in the midterm review document are the West Coast Expressway (Banting Taiping), Pahang-Selangor water transfer and Langat 2 water treatment plant, Bakun Hydroelectric project and KLIA expansion, while the Penang Outer Ring Road and Penang monorail projects have been deferred. In addition, due to soaring cost of building materials, the 2 nd Penang Bridge and the Double Tracking Project are being revalued. The cost of the 2 nd Penang Bridge project has escalated to RM4.58bn from the original cost of RM3.6bn whilst the cost of the double tracking project has been revised to RM23bn from RM14.5bn previously. On the other hand, construction costs have gone up at all levels of the value chain from building materials such as sand, steel, cement, concrete and roofing materials due to logistics. The government has moved towards liberalising the steel and cement industries, which supply the main components for construction. For the cement sector, it will gradually move into the Automatic Price Mechanism (APM) where the price of cement is determined by the demand and supply. The ceiling price on steel was

4 also abolished as such allowing open markets to decide on prices of steel. In addition, the Government is also proposing to lower the import duties on raw materials i.e. iron and steel to lessen the burden on the industrial sector. Earnings Outlook UEMB recorded a significant growth in revenue of 36%, achieving RM2.4bn for FY07 as compared to the previous year's RM1.8bn. This growth is mainly derived from the local construction sector which included the Electrified Double Track Project from Rawang to Ipoh and PLUS Third Lane Widening Project from Seremban to Ayer Keroh that was completed during the year. UEMB also managed to record a substantial increase in profit before tax of RM182.9mn for FY07 as compared to RM9.0mn in FY06. Included in the results was a net gain of RM90.4mn arising from dilution in its stake in of UK-listed Costain Group Plc. Excluding this one-off gain, the net profit was RM67.0mn, an improvement over the loss of RM21.5mn in FY06. Moving forward we expect a stronger net profit of RM118.2mn in FY08 attributable to construction progress gains momentum for the 2nd Penang Bridge. We believe that UEMB s construction margin is expected to improve from variation order that will be implemented by the Government under the key Ninth Malaysia Plan (9MP) projects which will reflect increases in prices of raw materials. UEMB is also well poised to bid for the toll concession when the time comes given its experience and expertise in highway and toll operation and maintenance locally and abroad. UEMB is also expected to continue to derive stable earnings stream from its infrastructure maintenance business and Penang Bridge concession. Under its five-year business plan, UEM Builders was targeting more overseas projects to achieve a balance between local and overseas projects to cut reliance on domestic projects. At present, UEMB has a reasonably strong outstanding order book of RM3.5bn and is likely to secure the RM1.2bn Cikampek-Palimanan Highway project in Indonesia soon. It is also strengthening its presence in India and the Middle East and pursuing new construction and infrastructure projects in Singapore, Indonesia and Papua New Guinea. 5. Recent Developments In February 2008, UEM Group whom is controlled Khazanah, whom in turn has 58.8% stake in UEM World has recently proposed a restructuring that enables shareholders to have direct participation in four listed subsidiaries by way of restricted offer for sale (ROS) at a 15% premium to their current share prices. UEM World currently owns 51.7% stake in UEMB, 62.2% of asset management consultant Opus Group, 72.5% of pharmaceutical company Pharmaniaga and 50.7% of cement maker CIMA. Under the proposed corporate exercise, UEM World shareholders will receive 125 UEM Land shares and RM cash for every 100 shares held. Shareholders will have the option to pay RM for a basket of 35 shares in UEM Builders, 21 shares in Opus, 5 shares in Pharmaniaga and 5 shares in CIMA. Shareholder whom do not subscribe to the ROS would be given a capital repayment plus shares in UEMLand. As such, in the event of non- or lowacceptance for the ROS on the listed subsidiaries, this will trigger a mandatory general offer (MGO) by UEM Group for the listed subsidiaries at the ROS prices. UEM Land will later take over the listed status of UEM World In April both UEMB and China Harbour Engineering Co Ltd (CHEC) have extended the execution and completion of the 2 nd Penang Bridge by nine months due to issues surrounding land acquisitions, design and cost. 6. Investment Risk UEMB is subjected to intrinsic risks existing in the construction industries. These include supply of materials, equipment and labour, changes in general economic business and credit conditions; and changes in government legislations and priorities. Fewer-than expected new contracts secured, lower-than-expected profit margins for construction projects, potential delay in the 2 nd Penang Bridge and execution risks for overseas construction contracts. UEMB s report was written without guidance from the management and without a company visit. The report could contain factual errors and may not include the latest available information. Disclosures were also limited to the postings in Bursa Malaysia website.

5 7. Balance Sheet Balance Sheet (RMmn) f Year-end: 31 Dec Total Assets Fixed Assets Current Assets Current Liabilities LT Liabilities Share Capital Shareholders Funds Recommendation In view of UEMB current outstanding order book of about RM3.5bn and the strong possibility of securing the RM1.2bn Cikampek-Palimanan Highway project in Indonesia and stable recurring income from its existing Penang Bridge and infrastructure maintenance business, we fairly value UEMB at RM1.47 pegging a PER of 12x based on an EPS of 12.3sen for FY08. Recommend a BUY.

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