UAC Global

UAC Global Plc (UAC) 

 

2Q14 recap. 2Q14 was poor with profit of Bt4mn, down 83%YoY and 72%QoQ, hit by high depreciation of Bt13.4mn (up 876%YoY) and financial cost of Bt7.1mn (up 549% YoY). 2Q14 revenue was Bt289mn,+16%YoY and +5%QoQ, but revenue from new projects compressed biomethane gas (CBG) and petroleum production project (PPP) was lower than expected and unable to meet the costs of the new business, sinking gross margin to just 8.3% from 18.0% in 2Q13 (though better than 7.6% in 1Q14). Revenue from CBG was only Bt120,000 in 2Q14 (1H14 Bt0.29mn vs. our 2014 estimate of Bt18mn) but operating loss was lower at Bt240,000 from Bt4.8mn in 1Q14. PPP revenue was Bt99,000 with operating loss of Bt14mn. Trading did best in this quarter with revenue growth of 40% YoY to Bt261mn and operating profit of Bt40mn. Equity sharing, mostly from Bangchak Biofuel Co., Ltd. (BBF), was very poor at Bt9.5mn, -30% YoY and-58%QoQ.

CBG plans unchanged. UAC continues to plan to set up 20 new CBG plants by end-2015: it will wholly own ten and hold 51% of the other 10. There are three plants under construction, while only one plant is operating. We are standing by on these until we can see how much they can add to revenue and gross margin in 2015.  

Bumpy road for PPP. The petroleum production project (PPP) produces compressed natural gas (CNG), liquefied petroleum gas (LPG) and natural gasoline (NGL) from associated gas, a byproduct of crude oil production. LPG and NGL production is running at a low utilization rate due to less feedstock than expected. It expects a 9-15-month delay in revenue from 2014. This business will be a short term burden to UAC. The company is fine-tuning to get more gas supply from nearby fields.  

Plans to expand to bio-energy. The Alternative Energy Development Plan (AEDP 2012-2021) targets renewable energy to supply 25% of total energy consumption by 2021. In the area of bio-energy, the AEDP plans 3,630MW from biomass and 600MW from biogas. Formerly this type of electricity attracted an adder of Bt0.3/unit for seven years but this has been changed to a feed-in tariff, to be announced soon. UAC likes this opportunity and plans to finalize two M&A transactions for total investment of Bt500mn to Bt1bn within 3Q14, expected to be in the area of bio-energy.

Upgrade to BUY, roll over 2015 target price to Bt11.5/share. Despite the delay in revenue from its new projects, particularly PPP, things are improving and we expect both to reach breakeven in 2015. We value UAC using DCF on its trading business of Bt5.6/share and add valuation for alternative energy of Bt5.9/share (in 2015) from Bt4.0/share (in 2014), including existing projects (CBG and PPP) and future projects from bio-energy, which gives a TP of Bt11.5.