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Broker's take: KGI downgrades Uni-Asia to 'neutral', halves target price to S$0.62

KGI Securities has lowered its call on Uni-Asia Group to "neutral" and halved its target price on the counter to S$0.62, citing that the group's business will be "hurt on all sides" amid the Covid-19 outbreak and a weaker overall macroenvironment. 

"The year ahead poses substantial challenges to the group as all its business segments - bulk shipping, Hong Kong property investments and Japan hotels - are impacted by the coronavirus outbreak," wrote KGI Securities' head of research, Joel Ng, in a report on Thursday. 

Uni-Asia reported US$0.8 million of losses for Q4 2019, compared to a US$2.3 million loss for Q4 2018, due to lower charter income and investment returns. Furthermore, its profit for Q4 2019 was severely impacted by S$5.9 million in depreciation of rights-of-use asset, as it adopted the new IFRS16 accounting standards, the brokerage noted. 

For fiscal 2019, Uni Asia's net profit rose to US$5.8 million from US$1.2 million a year ago, mainly due to a US$4.3 million disposal gain from a hotel sale in Japan, as well as US$6.2 million in investment returns, from the sale of commercial projects in Hong Kong.

The group has proposed a final dividend of 2.2 Singapore cents, bringing its full year dividend to 4.2 Singapore cents, including an interim dividend of two cents. "This is an implied 7.5 per cent yield at its current price, which has declined 24 per cent year to date," KGI noted. 

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Noting that Uni-Asia has "tough times ahead", the brokerage added that the virus outbreak has upended all forecasts made in its previous report in December 2019. 

"The disruption to the global supply chain, drop in demand for shipping and the significant decline in tourism will have a negative impact on all of Uni-Asia's business segments in 2020.

"This is especially true for its businesses in Japan, which contributed 55 to 61 per cent of the group's total income in 2017 and 2018, and represents businesses such as ship finance arrangement, investments and asset management of properties and hotels," Mr Ng wrote. 

Moreover, Japan's economy declined an annualised 7.1 per cent in Q4 2019, representing the steepest drop since 2014. "The country's economy faces the prospects of a further decline in Q1 2020 due to the impact of the coronavirus on tourism and exports. Adding fuel to the fire, the Tokyo 2020 Olympics, scheduled to be held in July and August, may possibly face delays by up to two years," KGI noted. 

That said, the brokerage also noted that Uni-Asia is facing challenges ahead with a stronger balance sheet.

For instance, net gearing improved to 69 per cent as at end 2019, from 103 per cent as at end 2018. 

In addition, management took a proactive approach to sell off assets last year and is recycling into other long-term opportunities such as healthcare management in Japan, KGI said. 

"For the year ahead, management has stated that it will focus on its Japan residential properties, which we expect to be relatively more resilient amid the coronavirus outbreak," the brokerage noted. 

Overall, given the headwinds the group will face in 2020, KGI has downgraded Uni-Asia to "neutral". The brokerage added that valuations are now at rock bottom with the counter trading at 4.9 times its price-to-earnings ratio forecast for fiscal 2020, and a 7.1 per cent dividend yield forecast for 2020. 

The report was produced by KGI Securities under the SGX StockFacts Research Programme.

As at 11.07am on Thursday, Uni-Asia shares were trading at S$0.53, down three Singapore cents or 5.4 per cent. 

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