10 Questions for Union Gas Holdings

Company Overview

Union Gas Holdings is a provider of fuel products in Singapore for over 40 years. Its business segments include Liquefied Petroleum Gas (LPG) cylinders under the Union Gas and Sungas brands, Natural Gas business which include compressed natural gas (CNG) and piped natural gas (PNG), and its Diesel business. The Group also has a Cnergy fuel station at 50 Old Toh Tuck Road which sells and distributes diesel to retail customers. Link to StockFacts company page

1. Describe Union Gas’ recent financial performances.

• Driven by the strong performance of its LPG business, the Group has achieved record highs for the financial year ended 31 December 2020 (FY2020) and its best performance since listing in July 2017. Despite the COVID- 19 pandemic, the Group recorded a revenue growth of c.9.4% to S$86.2 million and a c.64.7% YoY surge in net profit to S$13.9 million in FY2020.

• The LPG business achieved a c.29.5% YoY increase in sales to S$68.4 million in FY2020, driven by domestic sales (increased c.28.4% YoY) due to an increase in home cooking given the COVID-19 restrictions on dining out. The commercial LPG segment also registered an increase of c.30.7% YoY.

• The performance of our LPG business in FY2020 offsets the decline in revenue from our Diesel and Natural Gas businesses, which fell c.29.9% YoY to S$16.8 million and c.50.0% YoY to S$1.0 million respectively. Diesel and CNG sales saw lower demand due to work-from-home arrangements, reduced commute and the slowdown in economic activities during the circuit breaker. However, the impact on our Natural Gas business was partially offset by revenue recognised from the new PNG business launched in November 2020.

2. Can you elaborate on Union Gas’ busines segments. What would you maintain or change?

• In FY2020, the LPG business remained our largest segment contributing c.79.4% of our revenue, while c.19.5% was from the Diesel business and the rest from the Natural Gas business. We expect the diversification of our Natural Gas business since its expansion in November 2020, to lead to increasing revenue contributions moving forward.

• In March 2021, we announced our collaboration with Surbana Jurong to explore and study the feasibility of converting our existing Cnergy fuel station at 50 Old Toh Tuck Road into a multi-fuel, multi-energy filling station that offers alternative energy sources such as hydrogen and electricity. This may potentially broaden our business to include renewable energy in the future.

3. Does the Group Have a Dividend Policy?

• The Group’s dividend policy since FY2019 is to pay out not less than 50% of the annual net profit attributable to Shareholders excluding non-controlling interests and non-recurring, one-off and exceptional items. In FY2020, the dividend paid out in respect of net profit (excluding one-off Job Support Scheme grant) was c.56.2%. The declaration and payment of dividends is determined at the sole discretion of the Board of Directors of the Company, taking into account factors such as (but not limited to) the Group’s cash and retained earnings, financial performance, projected levels of capital expenditure and other investment plans as well as working capital requirements. For a full statement on the dividend policy, shareholders may refer to page 56 of our FY2020 Annual Report.

4. What notable developments can shareholders expect from Union Gas for the rest of 2021 and into the next year?

• We also expect to make progress on two announcements made in March 2021, to venture into alternative renewable energy sources and expand into overseas markets.

• First, we are partnering Surbana Jurong to explore converting our Cnergy fuel station into Singapore’s first solar and/or wind energy self-powered multi-fuels and energy facility station. A study will be conducted to assess delivery and storage solutions, including renewable solar and micro-wind energy solutions, battery storage systems and electric vehicles charging stations, and a natural gas-based power generation station supported by existing transmission pipeline and subsequent export to the power grid. We are also exploring the feasibility of hosting alternative low carbon initiatives such as the on-site production of hydrogen fuel through electrolysis and the corresponding dispensation of hydrogen fuel into hydrogen cell vehicles.

• The second announcement was in relation to our non-binding letter of intent with Worldbridge Industrial Developments Limited (WBID) for us to potentially expand our operations to the Kingdom of Cambodia and to drive strategic growth for our LPG business segment regionally. This is our first overseas foray and we see it as a steppingstone to potentially expand into the developing Mekong region. We will form a joint venture (JV) with WBID for the purpose of commencing operations. As the proposed JV represents our first investment and expansion into a different geographical territory, we intend to adopt a cautious approach. At the current juncture, we contemplate an initial modest investment before expanding and growing our overseas business at an appropriate pace.

5. Are there plans to diversify into other energy sources or consumer segments?

• Historically, Union Gas has always evolved with our customers’ changing energy needs by aligning ourselves with the Singapore government’s plans for the sector. We started distributing bottled LPG 40 years ago and launched our Cnergy station at 50 Old Toh Tuck Road (largest CNG fueling station then) when there was a big push towards CNG in the 1990s.

• Our plans with Surbana Jurong to explore converting our Cnergy fuel station into a multi-fuel, multi-energy fuelling station is a big step towards diversifying into alternative energy sources. If successful, we believe that it will be a blueprint to pave the way to expand our Cnergy branded stations locally or abroad.

6. Does the Group plan to use inorganic means (i.e. asset acquisitions) to grow its business? What are the key criteria for this strategy.

• Any potential acquisitions must have synergies with our existing business, fit into our strategic growth plans, and enhance our resilience. One such example is the non-binding Memorandum of Understanding (MOU) that we signed with Union Energy Corporate Pte. Ltd. (UEC) in June 2020, which sets out the framework for us to potentially acquire UEC’s LPG Distribution Business, LPG Bottling Business and LPG Storage Business. This is subject to certain terms and conditions to be negotiated and finalised. We are in the stages of negotiation and will ensure timely update announcement(s) as and when there are material developments.

• Acquiring UEC’s LPG Distribution Business will enable us to substantially increase our base of commercial and industrial customers and pave the way to potentially enter the wholesale space. We are currently an authorised dealer of bottled LPG cylinders for UEC and are dependent on UEC for supply given the limited number of suppliers in Singapore, and alternative sources of supply of bottled LPG cylinders may not be able to meet our volume requirements at competitive prices. Acquiring UEC’s LPG Bottling Business and LPG Storage Business will allow us to achieve greater efficiencies through the vertical integration of our supply chain, maintain our cost-competitiveness in the long run, and reduce our dependence on external parties for supply.

7. Given the focus on green and renewable energy, do you expect to see a shift in customer behaviour? What is the Company doing to ensure relevance?

• The Singapore government has set ambitious climate change plans and targets for greening our city and for increasing the supporting infrastructure for renewable energy. In line with this, we have already begun diversifying into alternative energy products by transforming our Cnergy fuel station to offer hydrogen and electricity. We have also expanded our natural gas business, to include PNG alongside CNG.

• However, we believe the current environment is unlikely to drive widespread consumer adoption and transition to renewable energy until the factors of accessibility, availability, and affordability are adequately met. In the meantime, our existing energy products remain relevant and important to households and commercial customers who may not be ready to give up traditional fuels. We will take exploratory steps towards greener energy products and continue to boost our capabilities in current products such as the MOU with UEC.

8. What are some of the risks for the industry and Union Gas, given the current COVID-19 outlook?

• 2020 was an unprecedented year with COVID-19, but it was also the year Union Gas achieved stellar results, driven by our LPG business, which was our main revenue generator at c.79.4% of FY2020’s total sales.

• Bottled LPG is a recurring business as customers have to re-order once they run out and is not as sensitive to cyclicality in the current environment when easily accessible and affordable alternative fuel products are unavailable. We are also one of the leading distributors of bottled LPG in Singapore with a sizeable market share. We will strengthen our resilience and operational efficiency by looking upstream and if successful, the potential acquisition of UEC’s LPG Bottling and LPG Storage Businesses will enable us to own and operate a holistic integrated LPG supply chain, to enhance our competitiveness and scale of the business.

9. What is the Group’s value proposition for its shareholders and potential investors?

• Strong heritage and track record of over 40 years, which is a testament to the resilience of our business and reflective of how the Group has evolved to changing consumer trends and behaviour.

• Established market leader with a sizeable market share in supplying bottled LPG cylinders to domestic households and commercial and industrial customers in Singapore.

• Sticky customer relationships with extensive distribution capabilities. We have over 200 delivery vehicles, supplying bottled LPG cylinders and LPG-related accessories to over 200,000 households in Singapore.

• Strategic growth plans such as the MOU with UEC which, if successfully negotiated and implemented, will enable us to build a vertically integrated business and increase resilience. Our partnership with Surbana Jurong may pave the way for the Group to move into greener fuel products, and the potential partnership with WBID to supply and distribute LPG in Cambodia will enable us to establish operations and open doors to the Mekong region.

• Strong balance sheet as we are a cash generative business with strong operating cash flows

10. What do you think investors may have overlooked about Union Gas’ business?

• Globally, as countries diversify into cleaner and greener fuels, we believe LPG will continue to be an energy source for domestic, commercial and industrial customers, and will be the case for Singapore.

• Furthermore, Union Gas’ founding family remains as our largest shareholder. The family is involved in many other businesses, which we believe may be complementary (such as transportation company, Transcab) that can potentially support demand for Union Gas’ products. We believe that this enhances the Group’s resilience and provides additional sources of business opportunities.

10 in 10 – 10 Questions in 10 Minutes With SGX-listed Companies

Designed to be a short read, 10 in 10 provides insights into SGX-listed companies through a series of 10 Q&As with management. Through these Q&As, management will discuss current business objectives, key revenue drivers as well as the industry landscape. Expect to find wide-ranging topics that go beyond usual company financials. This report contains factual commentary from the company’s management and is based on publicly announced information from the company. For more, visit sgx.com/research. For company information, visit https://www.uniongas.com.sg

Click here for FY2020 Financial Results