UOB KayHian (UOBKH) is initiating coverage on Uni-Asia with a “buy” call and target price of $2.34. This is slated to give the counter a 67.4% upside from its $1.40 call, analyst Clement Ho writes in an Oct 28 note.
The target is pegged to 8x 2021 P/E and compares to its regional peers which are trading at an average of 8.6x 2021 P/E.
Ho notes that the current valuations for Uni-Asia remain attractive at 4.8x/4.2x 2021/22 P/E.
The historically low valuation peg appended to the company was due to a lack of liquidity. "We believe thiswill improve given the strong earnings profile, adds Ho.
Uni-Asia is an alternative investment company that offers structured finance, ship charter arrangement, shipping and maritime asset management, real estate investments and other related services.
Ho’s “buy” move comes as the company is a prime beneficiary and laggard of the more than 210% year-to-date spike in dry bulk freight rates.
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Of Uni-Asia’s 18 drybulkers, 10 are wholly-owned while eight are jointly-owned. The fleet is typically hired out on a time charter basis, with Uni-Asia undertaking most of the voyage expenses, including bunker, port, fuel and crew costs.
Ho believes the company will benefit from an elevation in freight rates.
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“We believe the perfect storm has begun for a demand surge in the dry bulk industry, where shipowners will likely benefit with the anticipation that freight rates will stay elevated into end-2022,” he explains.
The recent spike in drybulk freight rates was caused primarily by a supply squeeze as vessels are stuck for a longer period of time in ports.
Rates are also pushed up by strong demand for various commodities and a deluge of drybulk newbuilds as buyers stay on the sidelines in anticipation of new ESG (environment, social and governance) standards on vessel emissions. Additionally, rates have been driven by the increase in time taken for the construction of new vessel orders to at least 24 months.
Meanwhile, the company is slated to see higher earnings thanks to the renewal of vessels. Presently, six of the 10 wholly-owned dry bulk carriers are up for renewal in 2H2021 while three are due in 1H2022.
Based on current freight rates, Ho estimates that revenue for 2H2021 and 2021 would rise by 38% and 42% respectively on a y-o-y basis.
This translates to a significant Earnings Per Share (EPS) turnaround in 2H2021 at 4.57 US cents (6.15 cents) (2H20: -4.97 US cents) and 2021 at 21.7 US cents (2020: -9.8 US cents).
“As charter rates remain elevated in 2022 given the industry supply shortage, our estimates suggest a revenue growth of 15% in 2022, which implies a two-year CAGR of 27.1% over 2020-2022,” says Ho.
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Shares in Uni-Asia closed up 6 cents or 4.29% at $1.46 on Oct 28.
Cover image: Uni-Asia