What happened
Shares of Union Gas Holdings Ltd (SGX: 1F2) tumbled more than 40% recently to a low of S$0.71. The stock last traded at a high of S$1.24 on 28 July 2021.
The magnitude of the fall prompted the Singapore Stock Exchange to query the volatility in the stock price.
So what
For 2021’s first half (1H2021), revenue has increased by 4.3% year over year to S$45.1m, while the cost of sales increased at a faster clip of 14.8% year over year to S$28.6m.
As a result, net profit declined by 24.9% year on year to S$5.3m in 1H2021.
Earnings per share was S$0.0229 in 1H2021compared to S$0.0305 in the same period last year.
Fuelling the top-line revenue was a 6.9% year-over-year uptick for the diesel business to S$9.3 million in 1H2021.
The Liquefied Petroleum Gas (LPG) business recorded a 2.2% year over year increase in revenue to S$34.7 million, mainly due to an increase in sales volumes and average selling prices.
The group declared an interim dividend of S$0.01 per share, doubling the S$0.005 per share declared in 1H2020.
“Our top-line performance in 1H2021 was a decent improvement over 1H2020 and reflected the expansion of our Natural Gas (‘NG”) Business to also include piped NG, as well as the increase in business and lifestyle activities that were in line with the more relaxed COVID‐19 restrictions during that period,’ said Executive Director and Chief Executive Officer, Mr Teo Hark Piang.
Now what
The stock is a six-bagger from its low in March 2020 to the recent high.
Investors had high expectations of the company going into the earnings season and are understandably disappointed to see the fall in net profit.
Some investors may have decided to take profit and adopt a wait-and-see mentality.
Despite the short-term softness in the earnings, management continues to focus on expanding its businesses through joint ventures in new areas and geographical expansion.
In 2020 it signed a Memorandum of Understanding (“MoU”) to acquire various businesses from Union Energy Corporation Pte. Ltd. (“UEC”).
These acquisitions will help the company to vertically integrate its supply chain and bring cost-efficiencies to the business, while the enlarged customer base will bring new opportunities and allow the business to scale.
In August 2021, the company announced that it had entered into a sales and purchase agreement with UEC to acquire Sembas (Asia) Trading Pte. Ltd., Semgas Supply Pte. Ltd., and Summit Gas Systems Pte. Ltd.
The acquired businesses supply and distribute LPG to the commercial and industrial sectors including factories, and also supply bottled LPG cylinders and provide storage of LPG.
These acquisitions will allow the group to expand its LPG business segment into the bottling and storage business and gain control of the supply chain.
The integration of its operations, ranging from procurement and bottling of LPG to storage and retailing, helps to enhance its offerings to customers.
With these acquisitions, the company is set to become the largest LPG bottling operator in Singapore.
With the expanded customer base, there will be opportunities for the business to scale up the LPG division to achieve operational efficiencies.
Management expects the deals to boost its earnings.
Union Gas has also ventured into alternative renewable energy sources by partnering Surbana Jurong Infrastructure Pte. Ltd. (“Surbana Jurong”) to explore the conversion of its Cnergy fuel station into a solar and/or wind energy self-powered multi-fuels and energy facility station.
The new facilities provide the group with optionalities to offer new products and solutions such as renewable solar and micro-wind energy solutions, battery storage systems and electric vehicles charging stations; and a natural gas-based power generation station.
The group also has the ambition to grow the LPG business in the region, starting with a joint venture with Worldbridge Industrial Developments Limited (“WBID”) to supply and distribute LPG in Cambodia.
The expansion into Cambodia marked the first step of its entry into the important Mekong region, whose building infrastructure is still underdeveloped.
This is where Union Gas can bring its expertise and experience to offer value-added solutions to customers in the region.
As of 30 June 2021, the group has cash and cash equivalents of S$30.4 million and total debt of S$13 million.
This cash stash provides adequate financial muscle to insulate the group from any short-term volatility in its operating environment while the management focuses on growing new revenue streams in the longer term.
Investors who take advantage of the recent sell-offs to accumulate shares in the company may be well rewarded in the future.
It may take a while for such investments to bear fruit, but the market is a weighing machine that rewards investors who focus on the long term.
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Disclaimer: Sunny Tan owns shares of Union Gas.
