SINGAPORE (June 13): SAC Advisors is initiating coverage on lubricant manufacturer and trader United Global (UTG) with a “buy” call and a target price of 37 cents.
UTG is expected to see strong earnings growth at a CAGR of 9% from FY16 to FY19E, says SAC analyst Terence Chua in a report last week.
“We expect UTG’s normalised earnings to increase 13.9% year-on-year in FY17, with half year of contribution from PT Pacific Lubritama Indonesia (PLI),” he says.
United Global in May announced that wholly-owned subsidiary United Oil Company is buying 95% of the issued and paid-up share capital of Indonesia-based PLI for $18.2 million, which will be funded via the group’s internal resources including proceeds from its IPO.
Pursuant to the completion of the proposed acquisition, PLI will become an indirect 95%-owned subsidiary of United Global.
“We view the acquisition of PLI as a major game changer for UTG,” says Chua. “We expect UTG’s earnings to increase by 3.9% and 10.1% in FY18 and FY19 with the consolidation of full-year earnings from PLI and cost savings that can be realised from the consolidation.”
For the full year ended Dec 31, 2016, United Global reported a 9.5% drop in earnings to US$5.6 million ($7.8 million), from US$6.2 million a year ago.
United Global says this was mainly due to one-off IPO expenses of US$616,000.
Group revenue fell 8.3% to US$91.5 million in FY16, from US$99.9 million a year ago.
This was main attributable to a 16.9% decrease in revenue from its trading business segment to US$40.8 million, on the back of a decrease in selling price and sales volume.
However, Chua believes that United Global is poised to benefit from an Asia-led expansion in the global lubricants industry.
“The key growth driver is expected to come from the burgeoning middle income class in emerging markets that will continue to fuel an expansion in construction activity, rising demand for industrial machinery and automobiles,” he says.
In addition, Chua notes that UTG is currently in a net cash position, with high average return on equity (ROE) of 23% from FY17E-19E. The stock is trading at 10.1x FY17 P/E, with a 3.4% dividend yield.
As at 1.02pm, shares of United Global are trading half a cent lower at 32 cents.
