IPO document for Union Gas Holdings has been lodged:
An old economy business that is shrinking and does not appear to have any firm prospects.
1) Its largest revenue generator comes from its LPG business, which has shrunk from $24.7m in 2014 to $21.2m in 2016.
Landed homes are the remaining customers of LPG, as market hawkers and coffee shops are moving towards piped town gas, which is mainly supplied by City Gas (CitySpring/Keppel Infrastructure Trust). As landed homes get redeveloped in the future with piped town gas, the retailing of LPGs through bottled cylinders will, slowly but eventually, be completely eliminated.
2) Its other business is the retailing of CNG, mainly to CNG-powered taxis, at their sole fuel station along Old Toh Tuck Road.
The business has shrunk from $19.6m in 2014 to $9.4m in 2016, as TransCab, which provides close to 80% of this segment's revenue, has not been replacing scrapped CNG-powered taxi. The lease of the CNG station at Toh Tuck will expire in December 2023.
Given the rate of the CNG's business decline, it may fold even before the lease is up. Also, Union Gas has an agreement to purchase a certain quantity of gas every year from supplier Pavilion Gas, failing which it has to pay for the difference.
It was not mentioned how much it is contracted to purchase.
3) Because of this, modifications were made in 2015 to the CNG station to retail diesel by adding diesel dispensers and storage tanks.
Revenue was $0.7m in 2015 and $5.0m in 2016.
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This is the only bright spark. However, there is a possibility that the station's lease may not be renewed in 2023, especially since the CNG retailing business -- which would have been the main reason for Union Gas to be award the lease -- seems to be dying.
4) Looking at the balance sheet, it has $11m of current assets vs $9m of current liabilities; not much value here.
How to evaluate an IPO - Union Gas IPO
It has no debt. It has $9m of PPE. So what physical assets are investors of Union Gas getting? The CNG/diesel fuel station at Toh Tuck valued at $3.5m, a fleet of trucks retailing LPG valued at $4.57m, and misc ppe $1m.
So if the business were to be liquidated, these are the assets to be sold. I'm sure they are worth less when sold.
The CNG/diesel fuel station should be written down to $0 if the lease is not renewed.
5) It seems like there isn't much value in its business, or on its balance sheet. Is this why 30m vendor shares, amounting to gross proceeds of $7.5m, are sold? Union Energy Corporation (UEC), which was the ultimate holding company for all of founder Teo Kiang Ang's LPG-related businesses, is not the company being IPO-ed.
Instead, he carved out the 3 business (LPG, CNG, and diesel retailing) from UEC for IPO, leaving out the LPG bottling plant business. Why did he do so?
Union Gas Limited
Is the bottling plant more lucrative? Union Gas, the company being IPO-ed, is being supplied exclusively by UEC for its LPG cylinders.
6) It FY16 audited net profit is $3.9m. How much are you willing to pay for this company?