What you need to know about Union Gas IPO

What you need to know about Union Gas IPO

Union Gas Holdings is an established provider of fuel products in Singapore with over 40 years of operating track record, is offering (IPO) 60M shares at $0.25 per share on the Catalist board, which will value the company at around 50M.

1.28M shares will be available for the public with the rest via placement. It will start trading on 21st July, 9am.

ipo

Union Gas’ business can be categorised into the following three (3) segments:

  1. Retail LPG Business –the retail distribution of bottled LPG cylinders and sale of LPG-related accessories to mainly domestic households in Singapore; the main revenue driver for the company

Revenue from Retail LPG Business decreased by approximately S$0.25 million or 1.2% from S$21.49 million in FY2015 to S$21.24 million in FY2016.

The decrease was mainly due to:

  • Decrease in the average selling price of bottled LPG cylinders by approximately 1.9% in FY2016 compared to FY2015 which reflected the decrease in cost of purchase of bottled LPG cylinders arising from a decrease in the Saudi Aramco Contract Prices
  • Decline in sales volume by approximately 0.6% from 9.62 million kg in FY2015 to approximately 9.56 million kg in FY2016 as a result of drop in demand and competition from other domestic bottled LPG cylinder dealers.

 

  1. CNG Business – operating a fuel station at 50 Old Toh Tuck Road to produce, sell and distribute CNG primarily to NGVs and industrial customers for their commercial use.

Revenue from CNG Business decreased by approximately S$3.51 million or 27.2% from S$12.92 million in FY2015 to S$9.41 million in FY2016.

The decrease was mainly due to:

  • Near 70% of segment revenue can be attributed to refueling of Trans Cab taxis, which is an affiliate of Union Gas.
  • Decrease in the average selling price of CNG by approximately 3.8% in FY2016 compared to FY2015 which reflected the decrease in cost of purchase of natural gas arising from decrease in High Sulfur Fuel Oil prices.
  • Decrease in sales volume by approximately 24.3% from approximately 10.63 million kg in FY2015 to approximately 8.04 million kg in FY2016 as a result of the continuing decrease in the number of NGVs in Singapore.

 

  1. Diesel Business – sell and distribute diesel to retail customers at fuel station at 50 Old Toh Tuck Road. Also engaged in the transport, distribution and bulk sale of diesel to commercial customers.

Strong growth in this particular segment but it is not a significant part of the business.

Revenue from Diesel segment increased by approximately S$4.36 million or 609.5% from S$0.72 million in FY2015 to S$5.07 million in FY2016.

Increase was mainly due to:

  • Increase in sales volume by approximately 729.3% from approximately 1.04 million litres in FY2015 to approximately 8.63 million litres in FY2016 arising from full year of diesel sales in FY2016 compared to five (5) months of diesel sales in FY2015 as the Diesel Business commenced in August 2015. This was partially offset by a decrease in selling price by approximately 14.4% in FY2016 compared to FY2015 as a result of the decrease in cost of purchase of diesel arising from decrease in international oil prices.

2Image from Union Gas Holdings Limited Offer Document

3Image from Union Gas Holdings Limited Offer Document

Despite revenue on a decline, gross margin grew from 18.4% to 32.5% and net profit increased from 2.4M to 4M. The numbers may look impressive on the surface but upon deeper analysis it is definitely not as optimistic as it seems.

4Image from Union Gas Holdings Limited Offer Document

First, note that company was only incorporated on 3 October 2016 in Singapore under the Companies Act as a private limited company under the name of “Union Gas Holdings Pte. Ltd.” Hence, figures from FY14 and FY15 were pro forma and unaudited. Note that there is a significant drop in cost of sales from FY14 to FY16, which accounts for the impressive growth in gross profit and net income margins.

However, given that cost of sales mainly comes from cost of purchasing LPG from their “Big Daddy” UEC, without looking at UEC’s accounts it is not clear if they had cooked the books and assumed heavy subsidization of the distribution of LPG which is not sustainable in the long run or if they are able to actually maintain such low rates into the future.

Analyst Opinion

It is important to note that the company undergoing IPO is NOT Union Energy Corporation(UEC), which is the “Big Daddy” holding company for all of Teo Kian Ang’s (the founder) LPG-related business. Union Gas Holdings, the company in question here, is only the distributorship arm of UEC that was restructured in Oct 2016 for IPO purposes. Hence the company owns neither the Union brand nor the LPG bottling plant, which is arguably the most valuable asset of the business. The only assets Union Gas Holdings are holding onto is the fleet of trucks that they had purchased from UEC (valued at around 4.5M) and the fuel station at Toh Tuck Road (valued at 3.5M).

As households and businesses switch to installing gas pipes and the inevitable dearth of CNG vehicles in Singapore it is hard to see any form of growth in their main product segments. In fact, the company themselves were pretty succinct and descriptive in their Product Highlights Sheet(Pages 7-9) on the ailing prospects of their business model here.

With NAV per share at $6.73, there is no value to be found in both its business model and assets. Hence, I struggle to see how the company can be worth 50M pre-IPO.

Also, if you are interested in this stock for its attractive dividend yield of around 4%, don’t. As stated in the prospectus of the company:

“We intend to recommend and distribute dividends of not less than 50% of our net profits attributable to our Shareholders in FY2017 (the “Proposed Dividends”). However, investors should note that all the foregoing statements, including the statement on the Proposed Dividends, are merely statements of our present intention and shall not constitute legally binding statements in respect of our future dividends which may be subject to modification.”

With their financial performance likely to decline in the future the dividend payout cannot possibly be maintained.

Overall, given the hype and lack of float of this stock it may be good for trading right after IPO, but definitely stay away if you intend to purchase it for the long term.


This column is written by @j_chou from InvestingNote.com.
@J_chou has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.

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