Excerpts from KGI report
Analyst: Joel Ng
|Minimising risk by restructuring exposure to hospitality sector
• UAG reported a net loss of US$3.9mn in 1H20, a reversal from the US$6.8mn profit in 1H19. We estimate a net loss
of only US$1.0mn when we account for the gains from the partial sale of the hotel business, offset by impairments.
• Maintain NEUTRAL and lower TP to S$0.54. While valuations are cheap, UAG faces strong headwinds over the next 6-12 months.
1H20 financial review. Total income fell 25% YoY to US$21.6mn, led mainly by the 25% YoY decline in charter income and 61% drop in investment returns.
Charter income fell as average charter rates plunged to around US$7,000/day in 1H20 from >US$9,000/day in 2012-2019.
As a result, the shipping business reported a net loss of US$11.2mn in 1H20, which also included US$8.3mn impairment of vessels, and US$1.1mn impairment of a loan receivable.
Excluding the total impairment of US$9.0mn, UAG would have reported an operating profit of US$1.7mn in 1H20.
We estimate a net loss of US$1.0mn when we factor in the US$9.0mn impairment and US$6.1mn gain from the partial sale of its hotel business.
Reduced exposure to hotel business, but now highly subjected to volatility in the shipping sector. In 2Q20, UAG reduced its stake in Uni-Asia Hotels Limited (UA Hotels), its Japan-based hotel management business, to 49.5%, down from 100%.
With the divestment of 50.5% in UA Hotels to the management team of UA Hotels, UAG no longer consolidates the financials of UA Hotels into its financial statements but will only recognise contributions under associate income.
This is perhaps a prudent move to avoid further risks from the hotel management business given how depressed occupancy and average daily rates are for all its hotels. Its hotel business reported a net loss of US$18.3mn in 1H20.
However, the partial divestment of UA Hotels has now thrown a wrench into our original investment thesis of UAG’s growth prospects, as the hotel management business was the biggest contributor to recurring income and expected to be the key earnings driver in the medium to long term.
Moving forward, charter income from shipping will contribute at least 60% of total income.
|Bright spot from asset management and property business. 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.
UAG’s property business, excluding the losses from the hotel segment, reported a net profit of US$2.8mn in 1H20.
UAG invested US$11.6mn into Alero projects in 1H20 and an additional US$11.4mn in the 7th and 8th Hong Kong property projects.
Valuation & Action: We maintain NEUTRAL despite the 30% upside to our S$0.54 fair value, as we expect weak earnings over the next 6-12 months.
Furthermore, we expect UAG to cut FY20/21/22F dividend to 1.0/1.5/1.8 Sing cents, down from our previous estimates of 4.0 Sing cents, as we believe it will be prudent for management to conserve cash amid the risk of a prolonged downtown in the global economy.
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.