DBS on Monday (Dec 5) initiated coverage on Union Gas with a &ldquo hold&rdquo call and a target price of S$0.48 on higher-than-expected margins and dividends.

 

The electrical retailer&rsquo s position as a market leader post-acquiring its substantial shareholder&rsquo s liquefied petroleum gas (LPG) distribution, bottling and storage businesses for S$75 million in August last year put the company in a good position for growth, said DBS analysts.

 

They further noted that the group was able to make a &ldquo strategic pivot into the commercial space&rdquo following the acquisition, which differentiated the company as one of the largest LPG players in the space, backed by a vertically integrated business model.

 

DBS forecast a revenue compound annual growth rate of 8 per cent for 2022 to 2024, driven by volume expansion and higher average selling prices amid increased fuel costs.

 

&ldquo Additionally, Union&rsquo s strong balance sheet could also drive inorganic growth,&rdquo said DBS.

 

In the near team, headwinds such as higher propane prices and a stronger US dollar exerted pressure on the company&rsquo s margins. This risk, however, appeared to have been priced in by the market.

 

Over the past year, Union&rsquo s share price corrected from its peak forward price-to-earnings (PE) ratio of more than 50 times to an estimated PE ratio of 22.7 times, which is below its four-year historical average of 24.4 times.

 

Analysts said in the second half of 2022, cooling oil or propane prices could provide some relief to such pressures.

 

Therefore, they predicted a target price of S$0.48, based on a forward PE ratio of 24 times in FY2023.

Union Gas has reported revenue of $68.3 million for 1HFY2022, up 11.6%, due to higher prices.

 

However, the company says it did not pass on higher costs incurred to its customers in a bid to retain customers and gain market share.

 

As such, earnings for the same period was down 83% y-o-y to $2.4 million.

 

&ldquo The operating environment has become very challenging amidst rising costs and recessionary concerns,&rdquo says executive director and CEO Teo Hark Piang.

 

&ldquo Despite higher fuel prices, we chose not to pass on the full increase in costs to our customers but kept prices at a level that was sustainable for both sides.

 

&ldquo This affected our profitability in 1H2022, but it presented an opportunity for us to gain market share and retain customers. We are also mindful that from a longer-term perspective, our customers&rsquo performance will ultimately have an impact on us and therefore it is in our interest to offer them some support,&rdquo says Teo.

 

The company plans to pay an interim dividend of 0.2 cent per share, equivalent to a payout ratio of 26% of its 1HFY2022 earnings.

 

The company is optimistic that its industry prospects remain positive due to the essential nature of its business as well as the potential to further exploit opportunities within the LPG supply chain of which it has full control ranging from procurement to retailing.

 

The company says remains on the lookout for further diversification and strategic opportunities to expand into complementary businesses both locally and overseas.

UNION Gas Holdings has agreed to further extend the maturity date for S$1 million worth of convertible bonds issued by ADERA AI, as the latter is in the process of undergoing a public offering and listing on &ldquo certain stock exchanges&rdquo .

 

In a bourse filing late on Friday (Jul 1), Union Gas said the maturity date of the bond has been further extended by 3 months to Sept 30, 2022, but did not indicate which exchange ADERA AI is seeking to list on.

 

Singapore-based ADERA AI is principally in the business of providing secure data handling services to clients in Singapore, Hong Kong, and Macau. It offers solutions for the transformation of physical documents to secured data using intelligent data capture, recognition scanning, additional validation technologies and archival services.

 

A wholly-owned subsidiary of Union Gas entered into the agreement last January to subscribe for the convertible bonds, which have an internal rate of return of 10 per cent per annum, and were scheduled to be redeemed 1 year after the closing date.

 

Union Gas announced in March this year that the maturity date had been extended to June 30, 2022, in view of the potential public offering and listing of the issuer.

 

If ADERA AI undergoes a public offering and listing on &ldquo certain stock exchanges&rdquo prior to the revised Sept 30 maturity date, the bonds shall be converted into shares at a 30 per cent discount to the public offering price.