Uni-Asia Group - UOB Kay Hian 2022-03-21: 2H21 Turnaround Accomplished, Further Gains Expected In 2022


Uni-Asia Group - 2H21 Turnaround Accomplished, Further Gains Expected In 2022

  • Uni-Asia delivered results that came in slightly above our estimates. Its balance sheet health is improving, supported by cash flow that has risen to record-high levels.
  • We see a gap between investor sentiment and the reality stemming from the Russia-Ukraine conflict. Beyond that, freight rates are expected to stay elevated at least until end-22 given the favourable demand-supply imbalance.

Uni-Asia Group's 2H21 results beat on elevated shipping charter rates.

  • Uni-Asia Group (SGX:CHJ) reported 2H21 net profit of US$11.0m (2H20: US$3.6m loss). This brought full-year net profit to US$18.0m, reversing from the US$7.5m loss in 2020 and slightly above our estimate of US$17.1m.
  • For 2H21, total income jumped 54.9% y-o-y to US$37.8m, mainly led by higher charter income of US$27.8m (+67% y-o-y) due to improved day rates as a result of better demand-supply dynamics.
  • Management proposed a dividend of S$0.05, consisting of 3 cents final and a surprise special dividend of S$0.02, bringing 2021 total dividend to S$0.07 (vs 2020: S$0.01), which represents a payout ratio of 22%.
  • Utilising healthy cash flow to pare down debt. In 2021, Uni-Asia's operating cash flow (OCF) spiked to US$28.4m (2020: US$6.8m, 1H21: US$8.1m). This was mainly used to pare down loans from US$114m to US$83.8m, with net gearing being reduced from 66% in 2020 to 36% in 2021. We are of the view that the healthier balance sheet now enables Uni-Asia to lift its payout ratio to 25% in 2022 and beyond, implying a 9.6% yield for 2022.

Charter income expected to continue northward.

  • Shipping industry consultant Marsoft expects seaborne trade demand to bounce back in 2Q22 and for the rest of 2022, boosted by a seasonal spike in grain trade and rebound in steel-related trade, as China limited domestic steel production to reduce pollution ahead of the Winter Olympics.

Potential opportunity stemming from Russia-Ukraine conflict.

  • We see a potential gap and trigger price competition.

BHSI Index suggests supply is short-squeezed.

  • As at 18 Mar 22, Baltic Handysize Index (BHSI) spiked 17.1% since military operations started on 24 Feb, and 10.5% year-to-date. Our channel checks suggest two fundamentally-changing factors:
    • the increase in oil prices have led charterers to slow-steam, and
    • alternative sourcing for soft commodities
  • have resulted in increased demand for longer-ranging routes, both of which have caused a short squeeze on supply amid the already-imbalanced demand-supply equilibrium due to unfavourable charter rates over the past few years.

Renewal of vessels’ rates to boost earnings.

  • Notably, 4 of the 10 wholly-owned drybulk carriers are due for renewal in 1Q22. Current handysize freight rates are above US$24,000/day, which have led us to increase our charter rate assumptions on Uni-Asia’s expiring charter agreements to US$24,000/day from our initial 1Q22 estimate of US$18,000/day.
  • We are of the view that charter rates will stay elevated in 2022 due to the favourable structural dynamics.

Uni-Asia Group - Earnings forecast revision & recommendation

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-21
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