SINGAPORE (July 1): NRA Capital is giving investment company Uni-Asia Holdings a higher fair value of $1.62 with an ‘overweight’ rating on the dry bulk shipping sector.

In a Friday report, NRA Capital’s head of research Liu Jinshu says the dry bulk sector may be hitting a bottom, which means good news for Uni-Asia as about 70% of its assets are ships.

Uni-Asia was hit by $0.7 million 1Q16 losses earlier this year, but Liu says these losses should narrow in 2Q16 as the ship values recover, and the group should see further recovery in the longer-term as charter rates are expected to improve.  

“The stronger charter environment suggests that Uni-Asia will likely enjoy better rates when renewing its charters,” elaborates Liu. “The exact upswing will be more gradual just as Uni-Asia’s charter income has been more stable than the overall Baltic Dry Index.”

“While several out of ten of Uni-Asia’s majority-owned bulk carrier ships are on index-linked charters, higher spot rates imply less drag on actual rates when the company fixes expiring charters that were entered into prior to 2015.”

Liu classifies Uni-Asia as a high-average return or average risk, as the danger of further-falling global trade volume due to slow economic growth is mitigated by the group’s diversified businesses and low price-to-book multiple.

The dry bulk shipping sector has been experience a dry spell for the past eight years.

Liu recalls on February 12 this year, the Baltic Dry Index reached a low of 291 before recovering 640 points as of June 30. The long decline came about as world trade volume has grown by only 14.9% from the end of 2007 while dry bulk tonnage in service has expanded by 86.6% over the same period.

According to him, the growth in dry bulk rates is partially attributable to higher iron imports by China, which increased in average volume of iron ore imports by 3.6% in the first five months of 2016, as opposed to a 2.2% growth last year.

While NRA Capital expects nascent recovery for the dry bulk industry, the research house says it will be uneven.

“The key risk is that ship owners may defer demolitions when charter rates recover, leading to faster supply growth as new ships come online, thus keeping charter rates low,” warns Liu.

“Likely, the industry may undergo several waves of lower and higher demolition rates in the recovery process. In the near, importers may also cut iron ore shipments on higher inventory.”

As at 2:32pm, shares of Uni-Asia are trading 0.86% higher at $1.17.