United Global Limited - CIMB Research 2016-11-25: Oiling long-run performance

United Global Limited - CIMB Research 2016-11-25: Oiling long-run performance UNITED GLOBAL LIMITED 43P.SI

United Global Limited - Oiling long-run performance

  • Lubricant manufacturer and trader with 17 years of track record and profitability.
  • Management expects earnings-accretive acquisition to triple capacity by 2017.
  • Potential beneficiary of both macro and structural trends (increasing motor vehicles, industrialisation in Asia, fuel efficiency and wear protection).
  • UTG offers 3.4% annualised dividend yield and trades at 9.6x FY15 P/E.

17 years’ track record in lubricants industry and profitability 

  • Listed on SGX-Catalist in July-2016, UTG is a lubricant manufacturer and trader under its in-house brands (United Oil, Bell1, etc.) and OEMs. It has a blending capacity of 44,000MT p.a, offering comprehensive and customisable solutions for clients at cheaper pricing, especially those lacking production volume. 
  • Given its cost-plus model, sensitivity to unfavourable movements in crude/ base oil prices is minimised, thus protecting UTG’s longstanding record of profitability.

Earnings accretive acquisition triples volume by 2017 

  • UTG will triple its blending capacity to c. 124,000 MT p.a with the recent MOU signed to acquire 100% stake in PT Pacific Lubritama (blending capacity by 80,000MT p.a.).
  • Management expects the acquisition to be earnings accretive upon completion by 1H17.

The acquisition will be funded partially by IPO proceeds (S$7.6m) 

  • Joining forces with CNOOC UTG has over the years entered into various collaborations with energy companies to expand its network in China, Indonesia, Malaysia and Myanmar. The partnership with CNOOC since 2015 is notable, as both companies co-own the “HydroPure” brand of lubricant products. 
  • CNOOC will help in the development and promotion of the products within the PRC, increasing UTG’s market share and sales.

Steady profits in FY16, excluding IPO expenses 

  • While UTG’s 1H16 results may seem disappointing at first glance, the c.20% yoy topline decline can be largely attributed to a c.17% drop in ASP (pegged to crude/base oil prices) vs. a -4% change in sales volume. 
  • Gross margins have shown a steady climb from 10.6% in FY13 to 14.0% in FY15 (1H16: 14.5%), partly from process improvement and the lagged effect of ASP adjustment. 
  • For FY16, management targets to achieve comparable financial performance (excluding one-time IPO expenses) vs. FY15.

Beneficiary of growing automotive production and industrialisation 

  • Asia is a key market where increasing automotive production and industrialisation are the drivers for lubricants. We note that China and Malaysia collectively represent c.45% of total regional demand. Heightened emphasis on fuel economy and wear protection also mean higher demand for better quality lubricants.

Net cash; 3.4% annualised dividend yield at 9.6x historical P/E 

  • UTG declared an interim DPS of 0.5 Scts in 1H16, implying 37.4% payout ratio (no dividend policy) and annualised dividend yield of 3.4% for FY16. This could be sustainable, backed by its net cash position of 2.2 Scts/share and 1H16 operating cashflow of US$5.6m. 
  • Annualising 1H16 core EPS of 1.35 Scts, UTG currently trades at 10.8x P/E (historical P/E of 9.6x), which is on par with AP Oil’s 10.4x FY16 P/E (9.3x historical P/E).

Target Price: N/A

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-25
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