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SINGAPORE (Mar 12): KGI Securities is downgrading its recommendation on Uni-Asia Group to “neutral” with a lower target price of 62 cents, given the group’s weak outlook, lack of near-term catalyst, and headwinds the group will face in 2020.

In its latest 4Q19 results, Uni-Asia managed to narrow losses by 77% to US$0.9 million ($1.3 million), from US$3.7 million in 4Q18. This came despite an 11% y-o-y drop in total income to US$33.2 million.

For the FY19 period, the group saw a significant increase in earnings to US$5.8 million from US$1.2 million in FY18, mainly due to the US$4.3 million disposal gain from the sale of a hotel in Japan and US$6.2 million investment returns from the sale of commercial projects in Hong Kong. FY19 total income increased by 10% y-o-y to US$136.0 million.

The group also proposed a 2.2 cents final dividend and a 2.0 cents interim dividend. This is an implied 7.5% yield at the stock’s price of 56 cents as of March 11.

In a March 12 report, analyst Joel Ng says, “The Covid-19 outbreak has upended all forecasts made in our previous report in December 2019. The disruption to the global supply chain, drop in demand for shipping and the significant decline in tourism will have a negative impact on all of Uni-Asia’s business segments in 2020.”

The analyst adds that this is especially true for the group’s business in Japan, which contributed about 55-61% of the group’s total income in 2017 and 2018, and represents businesses such as ship finance arrangement, investments and asset management of properties and hotels.

Additionally, the group is exposed to risks from recession, particularly in Japan, as the country’s economy declined an annualised 7.1% in 4Q19 and represents the steepest drop since 2014. Japan’s economy also faces the prospects of a further decline in 1Q20 due to the impact of the coronavirus on tourism and exports. And things may worsen for Japan as the Tokyo 2020 Olympics may be delayed by up to two years.

On a slightly positive note, the group is facing the challenges ahead of it with a stronger balance sheet. Net gearing has improved to 69% as at end 2019 from 103% as at end 2018. Management took a proactive approach to sell off assets last year and recycling into other long-term opportunities such as healthcare management in Japan.

“For the year ahead, management has stated that it will focus on its Japan residential properties, which we expect to be relatively more resilient amid the coronavirus outbreak,” says Ng.

As at 3.35pm, shares in Uni-Asia are trading 6.25% lower at 52 cents, giving it a FY20 price-to-book ratio of 0.3 times, with a dividend yield of 7.1%.