Excerpts from UOB KH report
Analyst: Clement Ho
|UNI-ASIA GROUP (UAG SP)
2H21: Turnaround Accomplished, Further Gains Expected In 2022
Uni-Asia delivered results that came in slightly above our estimates. Its balance sheet health is improving, supported by cash flow that has risen to record-high levels.
Beyond that, freight rates are expected to stay elevated at least until end-22 given the favourable demand-supply imbalance.
Maintain BUY with a higher target price of S$2.48 (from S$2.34), after rolling forward our valuation base year to 2022.
• 2H21 results beat on elevated shipping charter rates. Uni-Asia Group (Uni-Asia) reported 2H21 net profit of US$11.0m (2H20: US$3.6m loss). This brought full-year net profit to US$18.0m, reversing from the US$7.5m loss in 2020 and slightly above our estimate of US$17.1m.
For 2H21, total income jumped 54.9% yoy to US$37.8m, mainly led by higher charter income of US$27.8m (+67% yoy) due to improved day rates as a result of better demand-supply dynamics.
Management proposed a DPS of 5 S cents, consisting of 3 S cents final and a surprise special DPS of 2 S cents, bringing 2021 total DPS to 7 S cents (2020: 1 S cents), which represents a payout ratio of 22%.
• Utilising healthy cash flow to pare down debt. In 2021, operating cash flow (OCF) spiked to US$28.4m (2020: US$6.8m, 1H21: US$8.1m).
|"We are of the view that the healthier balance sheet now enables Uni-Asia to lift its payout ratio to 25% in 2022 and beyond, implying a 9.6% yield for 2022."
-- UOB KH report
This was mainly used to pare down loans from US$114m to US$83.8m, with net gearing being reduced from 66% in 2020 to 36% in 2021.
We are of the view that the healthier balance sheet now enables Uni-Asia to lift its payout ratio to 25% in 2022 and beyond, implying a 9.6% yield for 2022.
• Charter income expected to continue northward. Shipping industry consultant Marsoft expects seaborne trade demand to bounce back in 2Q22 and for the rest of 2022, boosted by a seasonal spike in grain trade and rebound in steel-related trade, as China limited domestic steel production to reduce pollution ahead of the Winter Olympics.
• Potential opportunity stemming from Russia-Ukraine conflict. We see a potential gap between investors’ sentiment and reality stemming from the Russia-Ukraine conflict.
There have been concerns of price pressure for drybulk charter rates due to a potential shift in supply dynamics, given that tonnage serving both countries would need to shift given the developments.
As Ukraine holds a sizable share of global exports for soft commodities (grains, wheat and oilseeds collectively contribute 12-30% of 2021/22 global output), vessel tonnage - specifically the smaller-sized classes namely Panamax, Supramax and Handymax - would shift to alternative sources and trigger price competition.
• BHSI Index suggests supply is short-squeezed. As at 18 Mar 22, Baltic Handysize Index (BHSI) spiked 17.1% since military operations started on 24 Feb, and 10.5% ytd. Our channel checks suggest two fundamentally-changing factors:
a) the increase in oil prices have led charterers to slow-steam, and
b) alternative sourcing for soft commodities have resulted in increased demand for longer-ranging routes, both of which have caused a short squeeze on supply amid the already-imbalanced demand-supply equilibrium due to unfavourable charter rates over the past few years.
• Renewal of vessels’ rates to boost earnings. Notably, four of the 10 wholly-owned drybulk carriers are due for renewal in 1Q22.
Current handysize freight rates are above US$24,000/day, which have led us to increase our charter rate assumptions on Uni-Asia’s expiring charter agreements to US$24,000/day from our initial 1Q22 estimate of US$18,000/day.
We are of the view that charter rates will stay elevated in 2022 due to the favourable structural dynamics.
• We have lifted 2022 and 2023 revenue forecasts by 18% and 25% to US$87.6m and US$85.9m respectively, after adjusting our charter rate assumptions from US$16,050/day to US$20,400/day for 2022, and US$15,800/day to US$21,000/day for 2023.
• Accordingly, net profit estimates have risen 22.6% and 37.4% to US$24.1m and US$21.8m for 2022 and 2023 respectively.
• Maintain BUY with a higher target price of S$2.48 (from S$2.34), after rolling forward our valuation base year to 2022.
Our target price is pegged to 6.0x 2022F PE (-1SD to the mean), implying a 14% discount to regional peers which trade at an average 7.0x 2022F PE.
At S$1.14, Uni-Asia trades at 2.8x 2022F PE and offers an estimated dividend yield of 9.1%.
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• Higher-than-expected freight rates in the handysize segment.
• Better-than-expected cost management.
Full report here.