SINGAPORE (Sept 26): KGI Research is maintaining Uni-Asia Group at “outperform” given the “deeply undervalued” stock has a highly profitable Japan-based property business.

Japan contributed 55-61% of the Uni-Asia’s total income in 2017 and 2018, according to a KGI report on Thursday.

This came from businesses such as ship finance arrangement, investments and asset management of properties and hotel operations.

Of particular interest is Uni-Asia’s hotel business and small residential projects in Tokyo. Often overlooked by investors, KGI analyst Joel Ng says the business is “highly profitable and provides a recurring income stream”.

Uni-Asia’s hotel operations are operated under the Hotel Vista brand, while the Alero brand develops low-rise buildings featuring between 10 and 30 units in Tokyo.

After a site visit, Ng says Uni-Asia’s Alero projects have consistently generated more than 20% Internal Rate of Return (IRR) in an investment time frame of two years.

In a given year, Uni-Asia can complete seven to eight of such residential projects and management is on the lookout to expand its property portfolio.

And once the projects are sold, Uni-Asia gets recurring income by providing management services such as rent collection and property maintenance.

As an added boost, Japan’s tourism sector may reach new heights from hosting two of the world’s largest sporting events, says Ng.

The nation is currently hosting the 2019 Rugby World Cup which ends on Nov 2. Meanwhile, it is also preparing for the Tokyo Olympics in 2020. 

“Uni-Asia’s valuations are trading at distressed levels, which we believe is not justified given its diversified businesses and potential growth from its hotel operations,” says Ng.

“Even if we were to strip out its highly cyclical shipping business, we estimate UAG’s minimum fair value to be around 82 cents,” adds Ng.

KGI has a fair value of $1.24, based on a sum-of-the-parts valuation of its three businesses. This translates into 0.6x FY20F book value and 8.5x FY20F earnings, supported by a 6% dividend yield.

As at 12.22pm, shares in Uni-Asia are trading at 71 cents.