Union Gas Holdings Limited (SGX:IF2) – Under-appreciated Cash Flow Machine with 7.5% Yield

  • Union Gas Holdings Limited (SGX:IF2) has reported an increase in profits for FY19 and ended the period with $6.8 million of free cash flows.
  • The double digit growth in revenue and profit is due to the incorporation of their commercial LPG business and it can have a positive impact on Union Gas’s future earnings.
  • The COVID-19 will likely hurt Union Gas’s earnings in the short term but it looks well positioned to face this tough period.

The weakness in the market can make 2020 a challenging one for Singapore’s economy. However, I feel that Union Gas is one of the few companies that can continue to grow its earnings while generating free cash flows.

Business Overview

Union Gas is an established provider of fuel products in Singapore with over 40 years of operating track record. Its 3 key business comprises Retail Liquified Petroleum Gas (LPG), Compressed Natural Gas (CNG) and Diesel.

Their business model is pretty straightforward. Previously, Union Gas only supply bottled LPG to the matured residential estates as well as private landed estates. In 2018, U-Gas was acquired and that is how they expanded their LPG business to the commercial and industrial sector.

They are a family business with Mr Teo Kiang Ang and Ms Alexis Teo leading the charge.

Earnings Recap

Union Gas released their FY2019 results last week in which the company’s profits grew 24% from 2.96cts per share to 3.68cts per share. The strong growth can be attributed in large part to the expansion of LPG supply to eating houses, coffee shops and commercial central kitchens.

Comparing the segment results for 2019 and 2018, revenue and profit for commercial LPG is the main driver for their growth. The other segments are also performing fairly well except for CNG which is dying a slow death due to the decrease in natural gas vehicles in Singapore.

The company also showed that returning capital to shareholders remains one of Union Gas’s top priorities. The company spent $5.4mil on capital expenditures and ended the year with $6.8mil of free cash flows They then used $4.2mil to reward shareholders by announcing a dividend of 1.55cts per share. In addition to their interim dividend of 0.3cts per share, total dividend yield is about 7.5% compared to current share price of S$0.24.

Looking Ahead

In my opinion, their move towards commercial LPG supply will yield higher growth as they continue to acquire more LPG supply agreement. In fact, it was only after this move which put them in my watchlist 2 years ago.

This is because I do not see residential LPG supply as a growing business. Mature residential estates will eventually be returned to HDB after their leasehold is up and pipe gas is all the rage in newer residential estates.

Commercial LPG is a different matter. A good example would be the canteen in the workers’ dormitory. If their location is somewhere along, say, Tanah Merah Coast Road it makes no sense to install gas pipe connecting from god knows where. Hence there will still be demand for commercial LPG for a long time.

In addition, with LPG spot prices nearing 10 year lows, Union Gas will stand to benefit with lower cost of sales which will lead to higher margins.

Risks and Short Term Headwinds

Highly Competitive Industry – Union Gas operates in a highly competitive industry where they generally compete on price, delivery time and track record. (Do a search on LPG Singapore and you will find a number LPG suppliers. I would say that Union Gas currently has a narrow moat due to them having one of the largest fleet of transport in LPG supply.

Restoration and Rejuvenation of Housing Estates – As mentioned in the previous chapter, new residential developments are embracing pipe gas or electricity. As more people move into the newer estates, demand for bottled LPG in the mature estates will decrease.

Covid-19 – The current headwind that everyone should be well aware of, is the Covid-19 virus. Business in eateries and hawker centres have slowed down in recent weeks and this will cause a lower demand for their LPG products. Hence, I expect their 1Q20 topline and bottom line to be lower than 4Q19.

Even so, Union Gas has a solid balance sheet (low debt to equity, high cash to debt) that could weather through this period of uncertainty.

Closing

For these reasons, I believe that Union Gas is looking good heading into 2020, a year when this fuel products supplier will not only grow in revenue but also generate strong levels of free cash flows.

Since IPO in 2017, its share price has been stagnant at around $0.24-$0.26. However, earnings growth has caused its PE ratio to decrease from 13x to 6.5x. Dividend yield has also increased from 4% to 7.5%.

I feel that the company is currently underappreciated which led to its low valuations despite strong earnings and dividend growth. My target price for Union Gas would be at a modest PE 8x, or $0.30 per share.

Cheers

Note: The Moss Piglet is vested in Union Gas at $0.245.

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