Excerpts from KGI report

Analyst: Joel Ng

Shipping upcycle; rates at multi-year highs

 

  • Uni-Asia Group

    Share price: 
    71 cts 

    Target: 
    91 cts

    Better days are ahead after a challenging 2020. Japan hotels and bulk shipping, UAG’s key revenue contributor, were significantly impacted by the outbreak of the pandemic last year. However, 2021 is a significant improvement for the group as it looks for new opportunities to embark on with its stronger balance sheet.

  • We upgrade to Outperform and raise our TP to S$0.91. Valuations are attractive amid the bulk carrier upcycle and resilient property markets in Japan and HK.


2020 business review. In 2020, UAG’s Japan hotel business was significantly impacted by Covid-19. At first, the group trimmed its stake in the hotel business from 99.0% to 49.5%, but completely exited in 1Q2021 when business conditions worsened.

Meanwhile, the bulk shipping business segment, the group’s other major revenue contributor, recognised US$7.9mn of impairment for shipping assets due to the severe deterioration of charter rates in 1H2020.

Taken together, this resulted in a FY2020 full-year loss of US$7.5mn for the group (vs FY2019’s US$6.6mn net profit).

UniChallenge vesselUni-Asia directly owns 10 dry bulk carriers and holds equity stakes in eight dry bulks under its joint-venture entities.

On a positive note. While UAG’s two main businesses suffered last year, its fee-based shipping business generated a profit of S$0.8mn in FY2020 despite US$1.1mn of impairments taken. In addition, its property-related businesses in HK and Japan contributed total profits of US$4.3mn for the year.

The property segment is split between the US$2.3mn profits contribution from HK commercial properties that were mainly from fair valuation gain, and the US$2.0mn from Japan property businesses which included ALERO residential property development and the healthcare & property asset management.


1Q2021 business update: brighter days ahead. As UAG has changed to semi-annual reporting, it has instead provided a 1Q2021 business update. It will announce 1H2021 results (w/ sales and earnings figures) on or before 31 August 2021.

Based on the latest business update, 2021 is off to a great start. Its shipping business, which now makes up 60-70% of revenue, has strongly recovered.

As a recap, the group has ten dry bulk carriers directly owned by the group and eight dry bulks under its joint-venture entities (UAG has an average 18% stake in the JV shipping entities).

Dry bulk shipping boom. Since the start of 2021, the supercharged rally in commodity prices has made shipping the most expensive in more than ten years.

The recovery in commodities and dry bulk shipping is driven mainly by the strong demand for almost every kind of commodity on the back of broad-based economic recovery and massive stimulus measures worldwide.

Earlier this month, the Baltic Dry Index (BDI) rose above 3000, the highest since 2010.

UAG is a key beneficiary of this boom and managed to achieve average daily charter rates of ~US10k for its dry bulk carriers, a 34% YoY improvement from US$7.4k in 1Q2020.

Valuation & Action: We upgrade to OUTPERFORM and raise our TP to S$0.91, based on SOTP valuations.

We raise the multiples for the shipping business to 0.5x FY2021F P/B from 0.2x FY2020F P/B previously while maintaining 0.5x FY2021F P/B for the HK and Japan property business.

Balance sheet remains healthy as it continues to pare down debt, and we forecast dividends to recover to 3.5/3.0/3.0 Sing cents for FY2021/22/23F (40-48% payout ratio), an implied 5% yield.

Risks: The longer-than-expected impact of COVID-19 outbreak on global economic growth will have an outsized impact on the shipping and hospitality sectors.


SOTP Valuation
JoelNg919Joel Ng, analystWe used an SOTP valuation and an exchange rate of 1.33 USD/SGD to derive our fair value of S$0.91. Our fair value is an implied 0.44x 2021F P/B.

In summary, Uni-Asia’s shipping and property businesses contribute 41% and 59%, respectively, to our total SOTP-derived fair value.

Key changes to SOTP valuation. We have removed the hotel management business’ valuations. We originally expected this segment to be the most promising business segment prior to the severe impact of Covid-19 on the hospitality industry.

On a positive note, multiples for Shipping is raised to 0.5x FY2021F P/B to reflect the strong recovery of the shipping segment.

Handysize bulk carrier specialist. Uni-Asia’s shipping segment consists of 19 ships: 10 handysize dry bulk carriers, 1 wholly-owned containership (UAG is looking to dispose this asset this year), and 8 ships under joint-investments (UAG has an average 18% stake in JV vessels).

We applied a 50% discount to the net book value of its vessels. In our view, this valuation is conservative and is based on book values that have largely been written down since FY16.

To date, it has written down more than US$20mn on its shipping assets.

Resilient asset management and property business. Its properties segment is divided into investments in HK commercial buildings and development of small scale residential properties in Tokyo.

It currently has five HK commercial projects under construction, all of them expected to be completed progressively over the next three years.

However, sales of the HK commercial units are delayed to at least 2H2021 in light of travel restrictions, and we forecast sales to pick up in 2022.

Looking at its Japan residential business, projects under the ALERO brand name are progressing as planned as rents have largely held up in Tokyo while property sale prices have remained stable.

We applied a 50% to the net book value of its HK and Japan properties and developments, which we believe conservatively values the potential upside when the properties are completed.


Full report here. 


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