Brokers' Take: UOBKH initiates Uni-Asia at 'buy' with target price of S$2.34
UOB Kay Hian (UOBKH) believes that Uni-Asia Group CHJ : CHJ 0%, which invests in cargo ships and real estate, is set to benefit from high dry-bulk freight rates, which have risen by more than 210 per cent in the year to date.
In a report on Thursday (Oct 28), the brokerage's analyst Clement Ho commenced coverage on Uni-Asia with a "buy" call and a target price of S$2.34, indicating an upside of 67.4 per cent.
Ho believes that freight rates will "stay elevated" throughout 2022, and attributed the recent spike in dry-bulk freight rates to a supply squeeze as vessels are stuck longer in ports, as well as a strong demand for various commodities.
There are also no meaningful increases on the supply of vessels because buyers are "staying on the sidelines" in anticipation of new environmental, social, and corporate governance (ESG) standards on vessel emissions, he added. The report also noted that any new vessel order would require at least 24 months for construction.
Ho highlighted that Uni-Asia, listed on the Singapore Exchange since Aug 2007, has had a "solid" dividend track record since 2017 and has continued paying dividends despite a loss-making 2020.
Uni-Asia's shipping segment, which contributed to some 90 per cent of its H1 2021 earnings, has a combined fleet of 18 handy-sized dry bulkers, of which 10 are wholly-owned and 8 are jointly-owned. Of the wholly-owned carriers, the rates for 6 are up for renewal in H2 2021, and 3 in H1 2022.
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Ho noted that the renewal of the vessels' rates will boost earnings for Uni-Asia.
Based on current freight rates, Ho estimated that H2 2021 and 2021 revenue would rise 38 per cent and 42 per cent respectively on a year-on-year basis. This translates to a "significant" earnings per share turnaround in H2 2021 at 4.57 US cents. The earnings per share turnaround for this year is projected to be 21.7 US cents, up from 9.8 US cents in 2020, Ho noted.
He said: "As charter rates remain elevated in 2022, given the industry supply shortage, our estimates suggest a revenue growth of 15 per cent in 2022, which implies a 2-year compound annual growth rate of 27.1 per cent between 2020 and 2022."
The "buy" coverage is pegged to 8 times the 2021 price-to-earnings ratio, which is lower by 1 standard deviation point to the mean; regional peers trade at an average of 8.6 times the 2021 price-to-earnings ratio, the report noted.
Ho said that current valuations for Uni-Asia are "attractive" at 4.8 times 2021 and 4.2 times 2022 price-to-earnings ratios, as well as a 2022 dividend yield of 4.3 per cent.
"Historically, the low-valuation peg appended to Uni-Asia was due to a lack of liquidity, which we believe will improve given the strong earnings profile," Ho said.
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