United Global Limited - SAC Capital 2020-09-09: Net Profit Lowered By 63.5% Due To De-Consolidation Of UOC


United Global Limited - Net Profit Lowered By 63.5% Due To De-Consolidation Of UOC

  • 1HFY20 reflected effect of the sale of 40% stake in UOC.
  • Lubricant business remains an integral part.
  • Maintain our HOLD call at lower target price of S$0.445.

Completion of sale of 40% stake in United Oil Company (UOC).

  • United Global (SGX:43P) had, on 26 November 2019, sold 40% of its equity stake in its wholly-owned principal subsidiary, United Oil Company Pte. Ltd. to Repsol Downstream Internacional S.A., a subsidiary of Madrid-listed international oil and gas company Repsol S.A..
  • Post the transaction, United Global reported its interest in UOC Group as a line item in the profit and loss statements as “Share of profit of joint ventures” and a corresponding entry in the balance sheet as “Investment in joint ventures”.
  • As a result of the de-consolidation of UOC, United Global reported revenue of US$38,000 for 1HFY20 from its only operating subsidiary which is engaged in the manufacture of nano-fibre oil absorbent materials. These products are sold to its 40%- owned joint venture company, M-TechX United Pte Ltd.

Lubricant business remains an integral part of United Global.

  • UOC reported a 46.3% fall in revenue to US$34.0m in 1HFY20 due to a decline in revenue for both manufacturing and trading businesses. Manufacturing saw sales down by 25.2% y-o-y due to lower sales volume and average selling price, mainly at its Singapore plant. Trading revenue decreased by 95.8% in the absence of a one-time trading agreement with a joint venture partner. As a result, gross profit fell 16.9% to US$8.4m in 1HFY20. However, as trading commands thin margins, gross margin improved 8.7 percentage point to 24.6%, also aided by lower raw material cost.
  • Overall, profit for the year for UOC stood at US$3.8m, 20.1% lower y-o-y. United Global’s share of profit was US$2.8m.
  • Orders for nano-fibre oil absorbent materials are slow to build up, and the plant is operating at below capacity. This resulted in a small gross loss of US$0.1m.
  • Overall, United Global recorded net profit of US$1.7m for 1HFY20, which was 63.5% lower y-o-y.

Robust cash position for right M&A opportunity.

  • As at 30 Jun 2020, United Global has a total cash and cash equivalents amounting to US$32.5m. United Global is also debt-free.
  • United Global’s strong financials put it in a favourable position to ride out the demand uncertainty from COVID-19 pandemic and volatility in base oil price. At the same time, it also provides the Group with the funds to pursue growth plan or venture into new businesses.

Maintain our call at HOLD at a lower target price at S$0.445.

  • While we expect the synergy derived from the joint venture to continue to drive United Global going forward, we expect net profit to fall as compared to previous years due to the disposal of the 40% stake. However, United Global is also in a strong net cash position to embark on growth and expansion plans.
  • Our target price of S$0.445 is derived from DCF valuation (WACC: 9.9%; terminal growth: 1.5%).

About United Global Limited

  • United Global is an established independent lubricant manufacturer and a lubricant, base oils and additives trader, providing a wide range of high quality, well-engineered lubricants and specialty fluids for automotive, industrial and marine applications as well as metal working fluids. It supplies lubricants globally to customers in over 30 countries and territories.
  • United Global has two key segments:
    1. Manufacturing of lubricants: This is done under its in-house brands, such as “United Oil”, “U Star Lube” and “Bell 1”. It also provides OEM manufacturing for third party principals under their brands. Following the disposal of UOC to Repsol Downstream International S.A.in November 2019, the Group is now able to manufacture exclusive Repsol-branded products and sell them in Singapore, Indonesia, Malaysia and Vietnam.
    2. Trading: Base oils, additives and lubricants. United Global buys from suppliers and on-sells to other customers who require such raw materials. It buys the raw materials in bulk, and sells them to other parties who may not be able to take advantage of the economies of scale that it enjoys by purchasing and transporting in large quantities, as well as long-term relationships with the suppliers. It also trades lubricants that are not manufactured by them.
  • In 2017, United Global set up a 40% joint venture with Japan’s M-TechX Group to produce oil-absorbent nano-fiber materials for various industrial and commercial industries. In 3Q18, United Global officially launched nano-fiber products. It mainly exports these products to Japan and is developing markets in Indonesia.
  • See

Lam Wang Kwan SAC Capital Research | https://www.saccapital.com.sg/ 2020-09-09
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.445 DOWN 0.50