UNITED GLOBAL: Acquisition of Indonesian company a game-changer

Excerpts from SAC Advisors' initiation report on United Global

Analyst: Terence Chua

High Performance Lubricants
A lubricant manufacturer and trader. Established in 1999, United Global Limited (“UTG”, “Company” or “Group”) is an established and independent lubricant manufacturer and trader providing a wide range of high quality, well-engineered lubricants under its in-house brands. The Group supplies lubricant products to over 30 countries and territories, serving mainly the automotive, industrial and marine sectors.

Jacky Tan, CEO of United Global at its manufacturing facility in Tuas. NextInsight file photo.
Strong earnings growth of 9% CAGR (FY16 – FY19E). We expect UTG’s normalised earnings to increase 13.9% year-on-year (“y-y”) in FY17, with half year of contribution from PLI.  We view the acquisition of PLI as a major game changer for UTG. 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.

The global lubricants industry is forecasted to expand at a CAGR of 2.4% with Asia poised to be the key driver of growth. 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.

Initiating coverage with a BUY with a target price of S$0.37. The stock is currently trading at 10.1x FY17 P/E, with a 3.4% dividend yield. UTG is also currently in a net cash position, with high average ROE of 23% from FY17E-19E. Our target price of S$0.37 is derived from our DCF (Cost of equity: 7.5% and terminal growth of 2.0%), representing 10.1x FY17 P/E.

Key risks: (i) Exposure to fluctuations in base oil prices and cost of raw materials and (ii) wide exposure to different sectors.