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Saturday, 15 July 2017

Union Gas Holdings Limited

Union Gas Holdings Limited ("Union Gas" or the "Company") is offering 60m shares comprising 30m New Shares and 30m Vendor shares at $0.25 each for a listing on Catalist. The IPO will close on 19 July 2017 at 12pm and starts trading on 21 July 2017. 1.28m shares will be available for the public with the rest via the placement tranche. The market cap is around S$50m based on the IPO price. You can find the prospectus here.

History of Union Gas

The founder of Union Gas is a self-made man. His rags to riches story was featured in the Straits Times in Oct 2014, do take some time to read here. He bid for the cab license and started Trans Cab with 50 taxis in 2003 and tried to list Trans Cab in Nov 2014 (my IPO write up is here) but unfortunately for him, the IPO was de-railed by a poison pen letter. With hindsight, the onslaught of Uber and Grabtaxi (one of the risks I mentioned), Trans Cab would be facing extremely challenging times now. Similarly, i can foresee challenging times ahead for Union Gas.

Principal Business and Future Plans

Union Gas is an established provider of fuel products in Singapore with more than 40 years of track record. The Company has 3 main business segments:
  • Retail LPG Business

Union Gas is a leading suppliers of bottled LPG cylinders to domestic households and CNG to retail and industrial customers in Singapore. It operates more than 100 delivery vehicles and supply bottled LPG to more than 140,000 households in Singapore. My family used to use Union Gas but we have since switched to Esso LPG cylinders. If you refer to the Financial Highlights section below, you can see that revenue from retail LPG business declined from $24.8m in FY 2014 to $21.2m in FY 2016. As more households switched to piped gas and a highly competitive and fragmented retail market, the revenue is likely to either stagnate (stablise if you really want a more positive word from me 😋) or continue trending downwards.

As part of its business strategy to "stop the downtrend", one of its future plan is to spend $4m of the proceeds to acquire other "dealerships" or competitors. Not sure if this is good for consumers 🤔

  • CNG Business

CNG vehicles are unfortunately not catching on due to lack of government incentives to do so. With increased tariffs and the cost of diesel being cheaper than CNG, the number of CNG vehicles have been shrinking over the years. See article here. A series of safety issues resulted in LTA requesting all CNG owners to send the cars for inspection and this is probably the nail in the coffin for CNG vehicles once the existing owners scrap their cars. So this is a business that would cease to exist in the coming years.  This is evidenced by the sharply declining CNG business from $19.7m in FY 2014 to $9.4m in FY 2016 (see Financial Highlights below). I will probably write off this business in 3 years.

The Company recently obtained a gas retailer license from EMA on 17 April 2017 which allows Union Gas to supply and retail pipled natural case to customers in the services and manufacturing industries in Singapore.  The Company intends to expand this to customers in F&B in 2018. The Company intends to use $1m to fund this new business. It is too early to tell if the Company will succeed in this new business line.

  • Diesel Business

This is currently not a significant part of the business and generated $5.1m in revenue last year.

Financial Highlights

Despite strong declining revenue, Union Gas is actually able to paint a nice glowing picture of increasing gross margin and profitability. Gross margin grew by 18.4% to 32.5% and net profit increased from $2.4m to 4m from FY2014 to FY2016. How in the world are they able to do this?

Let's take a deeper look.

The Company was able to show an increasing profitability over the last 3 years because it was able to "control" the cost of sales quite effectively given that the supplier is from UEC Group.  This is reflected by the declining cost of sales over the last 3 years.

In April this year, they also formalised the distributorship agreement and the pro-forma was presented. This helped to boost up the gross profits despite the declining revenue and improved the margins quite dramatically. Without seeing the books from UEC group, it is hard to determine whether this related party transaction is sustainable or whether it has been subsidized. However, let's take a look at the key assumption of the pro-forma. You can find the assumptions in Appendix 2.

The pro forma assumed the same fix rate for the last 3 years! We have no idea how this will impact FY2018 and beyond as the fix rate is only for FY2017. I think it is highly misleading to present the pro-forma financial statements here and somewhat painted a even more optimistic picture. 

Based on the historical performance, EPS is 1.98 cents for FY2016 and based on the enlarged share cap of 200m shares, the PE is 12.6x. The NAV per share will be 5.46 cents.

Dividend policy

The Company intends to distribute no less than 50% of its net profit as dividends for FY2017. Assuming a historical EPS of 1.98 cents is used, the dividend yield will be around 4%. This can be potentially higher at 6% if the Company is able to achieve a higher EPS as evidenced by its pro-forma statement.

What I like about the Company
  • Experienced management team - The founder has seen the ups and downs of the business and can probably provide sound advice to the management team. Alexis Teo, his daughter and CEO is the heir apparent with 13 years of experience. However, this savvy business man is not going to let go of its business for cheap. A picture of Alexis is below.

Some of my concerns
  • The Company is facing strong headwinds. The CNG (vehicles) and LPG business (domestic) are deteriorating as evidenced by the declining revenue over the last 3 years.
  • Scalability of business - The Company said in it may expand beyond Singapore and that there is "considerable potential to expand our offerings to household products and health products". I really don't see how this predominantly domestic player is able to scale its business know-how outside of Singapore or expand into healthcare products. Seriously?
  • The founder is selling vendor shares at IPO - I wouldn't like to see the founder cashing out in the face of challenging headwinds. The founder still holds 70% of the Company and the CEO (his daughter) holds zero at Union Gas but around 5% of UEC Group. The CEO has no stake in the game and her shareholding at the UEC Group creates potential conflict of interest everywhere! 
  • The crown jewel is still with the founder  - To be competitive in this business, you need to control the upstream (that is what the founder said himself in the interview "His earnings hit a plateau when the company exited the market. His margins became lower because of tight controls by the big boys who wanted to close the supply vacuum. I knew we had to bottle our gas," says Mr Teo, who started distributing gas under his own brand Union in 1995.". After this IPO, the founder still own Union Energy while Union Gas is just a distributorship arm that he listed. Ironically, Union Gas will not even own the trademark of Union Gas as that belongs to the UEC Group 😓. The small "saving grace" is that the Company has the right of first refusal if the bottling plant is ever sold. Why is the bottling plant not part of this IPO in the first place?
  • Related Party Transactions - It's tough trying to figure out the different related party transactions that affects Union Gas through the prospectus. There are potential conflict of interest everywhere and how they mitigate them will be critical
Fair Value

The company is being listed at a historical PER of 12x which is fair. Assuming the revenue remained the same, the pro-forma EPS of 3.06 cents can potentially be sustained for FY2017. However, i will assume a 20% decline due to the CNG business. The EPS will be 2.45 cents.

Assuming a fair value of 10-12x, the fair value is around 24 to 30 cents.

Given the headwinds, the only way it can continue to maintain the EPS is through buying cheaper gas, which i have no clue as to how to "guess it". (punt intended 😜) given that it is a real black box.

My Chilli Ratings

This is one IPO which i struggle to give a chilli rating. 

My gut feel for the IPO is that it will debut well given the positive IPO sentiments, supposedly low PE and high dividend yield. The small float of shares also made it easy for the gas and taxi tycoon to place out the shares to friends and family. Small punters should be able to get out easily at a profit.

However, for the longer run, I have a few key concerns:

  1. Union Gas is just a distributor and don't own the brand
  2. The transfer pricing is somewhat of a mystery each year and there are potential conflict of interest between UEC Group and Union Gas everywhere
  3. It is hard to buy into a Company whose fate is controlled by a company related to the key shareholder
  4. We are buying into a business where the CNG vehicles are depleting dramatically and where the LPG business is slowly being replaced by piped gas

It's probably a 2 chilli rating for the debut and 0 chilli rating for the longer run until we sort out some of the concerns mentioned above. The transfer pricing of the LPG is one area where transparency is needed and by having its own bottling plant, that conflict would have been resolved prior to the IPO.

Union Gas Straw Poll


Anonymous said...

Hi Mr ipo, were you given placement and will you be applying for a punt?

Mr. IPO said...

No placement offered. ^_^ probably will give the ATM a miss.

Seeking Private Returns said...

Wah... opinions equally split between the three choices. I thought it was a buy given the relative low P/E and low supply of shares to the public.

Given that response of subscription is good even for NetLink, this should the first test of how poll results will correlated with the opening price. With this divided opinion, feel it will be a muted opening at $0.28?

Mr. IPO said...

Gut feel 28-32 opening. 🤣

Anonymous said...

the crown jewel is the parent company. dont think the owner really need the ipo money. why listed ??

Anonymous said...

ipo money is free money?

Anonymous said...

At the moment, there are 3 CNG stations and Union is managing/operating 1 of them.

Mr. IPO said...

Use OPM to take risk lor

Meng said...

Just to add a few more observations:-

1. First of all, I will be looking at the Proforma numbers instead of the actual numbers as I feel that one needs to look at how did the Group perform as if they were already in place three years ago. Looking at the proforma revenue for the past three years, they are on a downtrend but profit is on a uptrend. Gross profit margins improved from 25.3% in FY2014 to 38.9% in FY2015 to 42.7% in FY2016. The reasons given were mainly the lower purchase price, decrease in depreciation expense, and lower custom and excise duty. But if you take a look at some of their expenses, they have increased despite a lower revenue:-

- Proforma marketing and distribution costs
Increased from S$5.9 million in FY2014 to S$6.1 million in FY2016 vs turnover of S$44.4 million in FY2014 and S$35.7 million in FY2016

- Proforma administrative expense
Increased from S$1.9 million in FY2014 to S$2.2 million in FY2016

This would also mean that they are not passing a lot of the savings derived from the lower cost of purchase to the end customers.

2. Of the total 60 million shares sold, 30 million are new shares and 30 million are vendor shares. However, the listing group will bear S$1.78 million of the total S$2 million IPO expenses whereas the vendor will only pay the 3% commission (S$0.22 million) for selling his 30 million shares. I guess, the portion that the company paid on behalf will be expensed off in the P&L of the listco in the current financial year.

3. Number of kg (in ‘000) in bottled LPG sold also decreased from 9,813.8 in FY2014 to 9,559,3 in FY2016. Similarly, for the CNG, number of kg (‘000) sold also decreased from 13,149.5 in FY2014 to 8.044.0 in FY2016. Both business segments are not looking good.

As disclosed in the prospectus, most of their LPG customers are mainly domestic households, comprising mostly matured and/or older estates and landed housing. It is very clear from here that the younger generations are not cooking much at home and most of them will have piped gas instead. As for the landed housing, they are buying cylinders as they do not have to option of piped gas.

As for their CNG customers, taxis under the Trans-cab group accounted for 70+% of the CNG business for the each of FY2014, FY2015 and FY2016. How many Trans-cab do have on the road now as compared to the last three years?

4. The Group also has quite significant capital expenditure last year and this year (up to 15 June 2017 - the Latest Practicable Date):-
FY2014 – S$4,000
FY2015 – S$741,000
FY2016 – S$5,819,000
1 Jan to 15 Jun 2017 – S$2,168,000

In addition, they have capital commitments of S$430,000 in relation to the purchase of two diesel tankers, and IT equipment and software. Depending on the depreciation policies for item, do expect to see a big jump in depreciation expense this year and the next few years.

5. Post listing, there will be 11 ongoing interested person transactions and lots of potential conflict of interests (see pages 181 to 187). Frankly, they should just list the whole group and eliminate all these interested person transactions and potential conflict of interest. But, they are not and in fact, still selling vendor shares at IPO. What message the owner is sending?

Meng said...

6. They will be putting aside S$4 million from the IPO proceeds for the acquisition of dealers in their retail LPG business. Not much information is provided on how much is needed to acquire one dealer. Also, as mentioned in the prospectus that there will be potential attrition of smaller players in the LPG industry. If so, is there a real need to acquire more dealers? It doesn’t seem to me that the company has any real need to raise money at this moment.

7. All their revenue are derived from Singapore. How much more revenue can they grow?

8. This is also a pretty labour intensive industry, any policy changes on workers will have an impact to them.

9. Market capitalisation at IPO is S$50 million. Based on a proforma profits of S$6.1 million, the fully diluted PER will be 8.18 times.

10. So, is the owner keeping the crown jewel private and cashing out on a company in the sunset industry?

Anonymous said...

Hi Mr Ipo,

1 more day to closing!
So u suscribing?

Mr. IPO said...

Nope. Will give it a miss.

Ren Xuan said...

the company has nothing beside the "Union" and has substantial IPTs

from financial can tell, the company has made profit of 9m+ for 3 years by bookkeepers

even the share price can more than 25cents on IPO, but will drop after that.

since the freefloat is very minimum, the share price should be quite unpredictable

tmr will know...

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