Recently, while I was researching stocks to add to my portfolio, I came across a few Singapore-listed companies that I thought were interesting. A quick search on the internet also showed that these companies are not extensively covered by big-name investment analysts. In this article, I will talk about the third company that I like: United Global Ltd (SGX: 43P). For the first two companies in this series, you can check out the following:
1) Company 1: Advancer Global Ltd (SGX: 43Q) – head here
2) Company 2: Samurai 2K Aerosol Ltd (SGX: 1C3) –…
Recently, while I was researching stocks to add to my portfolio, I came across a few Singapore-listed companies that I thought were interesting. A quick search on the internet also showed that these companies are not extensively covered by big-name investment analysts.
In this article, I will talk about the third company that I like: United Global Ltd (SGX: 43P). For the first two companies in this series, you can check out the following:
United Global, which listed in Singapore’s stock market on 8 July 2016, is an independent lubricant manufacturer. It serves mainly the automotive, industrial, and marine industries.
The company manufactures a wide range of lubricant products under its in-house brands – such as United Oil, U Star Lube, Bell1, Hydropure and Ichiro – and supplies these products to over 30 countries. It also produces lubricants for third-party brands. In addition, United Global trades base oils, additives, and lubricants.
United Global can customise its products and production volumes to cater to specific customers’ needs. This could be one of the company’s competitive advantages. In 2015, more than 80% of United Global’s revenue was from repeat customers – this showcases the stickiness of its business.
The financial numbers
One of the main things to look at before investing in a company is its financial performance. From 2013 to 2017 (the company has a 31 December year-end), United Global’s revenue had declined from US$102.1 million to US$99.8 million, possibly due to volatile base oil prices and general weakness in the global economy.
According to its 2016 annual report, “the price of lubricants is driven more by the supply and demand of the base oils and lubricant markets, the branding of the lubricants and the availability of lubricants with the respective specifications.”
However, despite the slight fall in revenue, the company’s gross profit margin rose from 10.6% in 2013 to 18.5% in 2017, with lower base oil prices possibly having played a role in the improvement. Furthermore, net profit nearly tripled from US$3.3 million in 2013 to US$9.2 million in 2017.
As of 31 December 2017, United Global’s balance sheet carried US$10.6 million in cash and bank balances, and US$9.0 million in total borrowings.
In 2016 and 2017, the company generated an average of US$5.6 million in operating cash flow, and incurred an average of US$0.7 million in capital expenditure. This gives an average free cash flow of US$4.9 million. Free cash flow is cash that the company can use to pay out dividends to shareholders, buy back shares, make acquisitions, or strengthen the balance sheet, among other things.
The growth drivers
In 2017, United Global inked new joint venture deals with its partners in Taiwan, Myanmar, and Japan. This is in addition to its strategic partnership with CNOOC Oil & Gas (Taizhou) Petrochemical Co Ltd in 2015 to collaborate and market lubricant products in China and other markets.
United Global also completed a significant acquisition of its strategic partner in Indonesia – PT Pacific Lubritama Indonesia (PLI) – in July 2017. The acquisition has helped United Global to become a much bigger entity, with its storage capacity increasing by more than 12 times. In United Global’s 2017 annual report, the company added:
“With the acquisition, the integration of our successful operations in Singapore and Indonesia resulted in a much larger business with triple the blending capacity to power the Group’s growth amidst volatility and uncertainties in the global business environment. Post-acquisition, the Group is working towards realising synergies by increasing business development efforts, ramping up the utilisation of PLI’s blending plant in Indonesia, investing in key leaders and tapping on each other’s expertise and cost advantage.”
According to United Global’s initial public offering (IPO) prospectus, the “world demand for lubricants is expected to rise 2.0% yearly through 2019, and the fastest gains are expected in the Asia-Pacific region, where a greater number of motor vehicles in use and continued industrialisation in large countries such as China and India will support rising demand for lubricants.”
The low estimated growth rate for United Global’s market does not look attractive, but the rising middle class in this region should still bring about steady improvement in the business.
The Foolish takeaway
United Global is in a “boring” industry, and that’s a trait I like. It also has potential for growth in the years ahead with its various joint ventures and strategic partnerships. Currently, United Global is valued at around 11 times trailing earnings, and has a dividend yield of 2.6%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.