KGI Securities analyst Joel Ng has maintained his “neutral” rating on Uni Asia Group, with a lowered target price of 54 cents from 62 cents previously, as he expects weak earnings for UAG over the next 6-12 months.
In a report dated August 25, Ng noted the 25% drop in y-o-y income in 1H20 to US$21.6 million ($29.56 million), led mainly by the 25% y-o-y decline in charter income and 61% drop in investment returns. Charter income fell as average charter rates plunged to around US$7,000 per day in 1H20 from over US$9,000 per day in 2012-2019.
As a result, the shipping business reported a net loss of US$11.2 million in 1H20, which also included US$8.3 million impairment of vessels, and US$1.1 million impairment of a loan receivable.
Excluding the total impairment of US$9.0 million, UAG would have reported an operating profit of US$1.7 million in 1H20. He estimates a net loss of US$1.0 million when we factor in the US$9.0 million impairment and US$6.1 million gain from the partial sale of its hotel business.
In 2Q20, UAG reduced exposure to hotel business, by reducing its stake in Uni-Asia Hotels (UA Hotels) to 49.5%, down from 100%. With the divestment of 50.5% in UA Hotels, UAG will no longer consolidate the financials of UA Hotels into its financial statements, but will only recognise contributions under associate income.
Its hotel business reported a net loss of US$18.3 million in 1H20.
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Ng said 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.”
However, he added “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.
As such, Ng also expects UAG to cut dividends for FY20, FY 21 and FY22 to 1.0, 1.5, and 1.8 cents respectively, down from the previous estimate of 4 cents, as he believes it will be prudent for management to conserve cash amid the risk of a prolonged downtown in the global economy.
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Despite the gloomy earnings picture, there is a bright spot from UAG’s asset management and property business. In UAG’s 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$2.8 million in 1H20.
As at 2.17pm, shares of UAG traded at 46 cents, with a price-to-book ratio of 0.2 and dividend yield of 1.1%.
