Excerpts from KGI report
Analyst: Joel Ng
|• Higher and stronger. UAG reported a 1H2021 profit of US$7.0mn, reversing from the US$3.9mn loss in 1H2020. The reversal was mainly on the back of the 49% YoY surge in charter income.
• Maintain Outperform and raise TP to S$1.56 (from S$1.42). Valuations are attractive amid the stronger-than-expected bulk carrier upcycle.
Our TP implies a 0.7x FY2021F P/B, which is still a conservative 30% discount to international peers who are trading above 1.0x P/B.
UAG has the wind behind its back. UAG reported a stellar 1H2021. The bottom line reversed from a loss of US$3.9mn in 1H2020 to a US$7.0mn profit in 1H2021, driven mainly by its shipping segment.
Charter income rose 46% YoY to US$20mn as average daily charter rose to about US$10,900 in 1H2021 compared to around US$7,000 in 1H2020. As a result, its shipping business reported a profit of US$9mn in 1H2021, vs a US$11mn loss in 1H2020.
UAG’s balance sheet continued to strengthen, with total debt declining to US$95mn as at the end of 1H2021. Given the stronger-than-expected results and positive outlook in 2H2021 and 2022, shareholders will be rewarded with a 2.0 Sing cents interim dividend.
UAG has right assets at the right time. The broad-based increase in commodity demand and the tight supply of vessels have pushed Baltic Freight rates to their highest in more than 10 years. The market for handysize, which UAG specialises in, is even more favourable as rates rise to their highest since 2008. Current charter rates are above US$25,000 per day.
Seven of UAG’s wholly owned dry bulks will renew in 2H2021 while three will renew in 1H2022 (Figure 4). We expect charter rates to remain resilient at these levels, or even increase, amid historically low order book, rising scrap rates and further cuts in operating speeds.
Upcoming short-term dry bulk demand catalysts. We are approaching the traditionally 3Q peak season as the northern hemisphere grain season begins. Furthermore, the US Senate recently passed the US$1 trillion infrastructure plan that will ramp up demand for steel and other construction materials, thus driving up bulk shipping demand. Seaborne trade is traditionally correlated to economic growth.
Bear markets are the authors of bull markets. The dry bulk shipping market went through a challenging decade driven by the excess supply before the global financial crisis. The current decade is setting up for a much tighter market due to discipline among ship owners, led partly by the reluctance to build new vessels that may become obsolete in 2030 when ships are required to cut carbon emissions by 40%.
HK and Japan property updates. The Japan property business continues to grow, with assets under management increasing from JPY30bn (end-2020) to JPY32bn (end-1H2021). Meanwhile, UAG’s five HK commercial properties will likely only contribute from 2H2022 onwards, given the relatively high HK office vacancy rates and weak leasing demand. UAG will plan to market properties 4 and 5 by the end of this year, which will give us more colour on prices and demand.
|Valuation & Action: We maintain an OUTPERFORM rating and TP of S$1.56, based on SOTP valuations.
The favourable supply-demand dynamics for handysize dry bulk carriers should benefit the group over our forecast period.
We maintain our multiple-based valuation for the shipping business at 0.8x FY2021F P/B and 0.6x FY2021F P/B for the Japan & HK property business. UAG’s balance sheet remains healthy as it continues to pare down debt; this will likely be a precursor to higher full year dividends.
Risks: A supply-demand imbalance in the dry bulk shipping sector that leads to a drop in charter rates will have the largest short-term impact on UAG’s earnings.
Full report here.