Uni-Asia Group Limited (‘Uni-Asia’) is an investment group investing in cargo ships (dry bulk) and properties that is listed on the main board of SGX-ST (ticker code: SGX:CHJ). As at 13 June 2021, it has a market capitalisation of S$61 million. Founded in 1997 and IPO-ed in 2007, it is headquartered in Hong Kong and has business activities in dry bulk carriers as well as properties. Heartland Boy believes that Uni-Asia could be an interesting turnaround laggard.
Business Model of Uni-Asia Group Holdings
Uni-Asia is involved in 2 key businesses as shown in Diagram 1:
Uni-Asia strives to provide one-stop integrated ship-related service solutions to its clients. Its key business is still that of a ship owner of Handysize and Supramax Dry Bulk Carriers that are leased out to third parties for charter income. It has a relatively young fleet, with 10 wholly-owned bulkers while remaining 8 bulkers are held under joint-investment entities where its stakeholding ranges from 18% to 49%. Having a portfolio of 18 vessels provide some negotiating power during purchase of stores, ship spares etc in the bulk carrier market. It also has an in-house technical management company in Shanghai that focus on bulk carriers to better control costs as well as change of crew.
Other ship-related services that it offers include maritime asset management as well as brokerage and ship finance arrangement solutions as disclosed in its annual report.
This sector includes the development and sale of small residential property projects under the ALERO brand in Japan which have gradually forged a good reputable standing among home-buyers. Unfortunately, it exited its hotel operating business as it was the wort hit during the Covid-19 pandemic.
Development and sale of commercial offices in Hong Kong (8 current projects) and China. Some of the properties have completed and are waiting for the right market conditions to commence strata sales.
Investment Merits of Uni-Asia Group
1. Dry Bulk Market Charter Rates At Decade High
After plunging during the depths of the pandemic, dry bulk market charter rates have since assumed a strong upward trend as shown in Diagram 2. Note that the rates continued to climb even higher in May 2021.
A key reason was the recovery in China’s industrial production operation since late 2020 as China managed to bring the pandemic under control. Accounting for 40% of the global dry bulk trade, China plays an outsized role in influencing the overall health of the dry bulk market. What is exciting to ship owners is that the increase in charter rates simply add to profits as cost seldom increase proportionately.
It is important to note that soaring charter rates count for nothing if Uni-Asia is not able to capitalize on them by being locked in long-term fixed charter contracts.
2. All its vessels are up for renewal in 2021 and 2022
Call it management foresight or plain luck but the good news is that ALL of its wholly-owned dry bulk portfolio are due for renewal in 2021 and 2022. In its 1Q2021 business update, Uni-Asia revealed that it has already renewed or extended 6 ships for duration ranging from 6 months to 1 year, with the remaining ships to be renewed in the 2H of 2021. There is already growing evidence that those vessels renewed recently have led to a significant upturn in its average charter rates as shown in Diagram 3.
Meanwhile, 3 of the remaining 9 ships held under joint investments have charter periods expiring in 2021.
By assuming an average of US$12,000 in charter rate and a total of 4,000 operating days, charter income is forecast to reach US$48 million. This compares with US$30 million and US$36 million generated for FY2020 and FY2019 respectively.
3. Cheap Valuation
Its NAV as at 4Q2020 is US$1.52. At a stock price of $0.78, Uni-Asia Group trades at 0.38X Price to Book.
4. Consistent Payment of Dividends and Reducing Debt
Despite suffering losses last year, Uni-Asia continued to pay dividends to reward its shareholders for their loyalty as shown in Diagram 4. This marked the 9th consecutive year that it has paid dividends.
In 2019, Uni-Asia also announced a formal dividend policy that guided towards 35% – 40% consolidated net profit after tax for FY2019 and FY2020. Assuming the same dividend payout ratio, we can expect full-year dividend to be approximately in the range of 4.5 to 5.5 cents based on charter rates of US$12,000/day and a 40% dividend payout ratio. Hopefully, it will shore up investor confidence by resuming dividend payment on a semi-annual basis.
Furthermore, it has been paring down debts gradually in the past few years as shown in Diagram 5.
Gearing should continue to go down as it has plans to capitalize on the equally buoyant containership shipping market to sell its remaining containership held under joint investment. Management has also committed to reducing total and short-term borrowings as part of its deleveraging strategy.
5. Heavy Insider Buying
I seldom come across a stock whereby so many insiders are buying in such a short time. In the past 6 months which coincidentally coincided with the dry bulk market boom, the following insiders have made multiple repeat purchases:
- Ham Yong Kwan a substantial shareholder last purchased shares on 3 June at average price of $0.74
- Michio Tanamoto the Executive Chairman last purchased shares on 21 May at average price of $0.665
- Masahiro Iwabuchi the Executive Director last purchased shares on 18 May at average price of $0.67
- Kenji Fukuyado the CEO last purchased shares on 2 Dec at average price of $0.630
Insiders buying lend credibility to the fact that they believe Uni-Asia is undervalued in current market circumstances.
Investment Risks of Uni-Asia Group Limited
1. Value Trap Risk
Historically, Uni-Asia has been trading at 0.31-0.39 x P/B for the past decade which might suggest that it may stay there for the long term. Therefore, it could represent a value-trap for those who is looking for a bargain owing to current valuations. While this risk is indeed present, I feel that the downside is rather limited since it is already trading within these bands. In contrast, the upside is “unknown” and presents an opportunity. Moreover, with dry bulk charter rates at decades high, this might well be the catalyst to break this long-term average P/B.
2. New Covid-19 mutations
As one could imagine, the Covid-19 pandemic had posed significant challenges to crew changes. It is not just the physical health of the crew that is at stake, but their mental health have taken a toll as well since it has not easy to find ports for crew to disembark on land. Any new Covid-19 mutations that current vaccines are not able to counter could lead to prolonged disruptions to operations of its ships.
Review of Uni-Asia Group Limited
I was first introduced to Uni-Asia Group in an investment group and subsequently in forums which piqued my curiosity to conduct further research and analysis. At first glance, a stock with such unstable financials would not have usually passed my fundamental analysis requirements. However, I am surprised that its share price has not kept pace with the surging dry bulk charter rates. This lag can be attributed to a combination of these factors – stock is illiquid, it is an unloved micro-cap with little analyst coverage that is just waiting to be “discovered”. The last time I made an investment based on similar sentiments was United Hampshire US REIT.
I figured that Uni-Asia’s time may come when it makes its 1H2021 financial results announcement sometime in August. Meanwhile, I am willing to set aside a small portion of my investment portfolio to see if my investment thesis of it being an interesting turnaround laggard bears fruit. However, this is unlikely to be one stock that I would hold for the long-term as I would probably just ride on the coattails of the surging dry bulk charter rates.
Analyst report from KGI indicate a target price of 0.91. Vested at SGD 0.68 since May 2021.
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This article was published on 14 June 2021.
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