Brokers’ take: DBS initiates ‘hold’ on Union Gas, optimistic on growth post-acquisition
Yong Hui Ting
DBS on Monday (Dec 5) initiated coverage on Union Gas with a “hold” call and a target price of S$0.48 on higher-than-expected margins and dividends.
The electrical retailer’s position as a market leader post-acquiring its substantial shareholder’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 “strategic pivot into the commercial space” 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.
“Additionally, Union’s strong balance sheet could also drive inorganic growth,” said DBS.
In the near team, headwinds such as higher propane prices and a stronger US dollar exerted pressure on the company’s margins. This risk, however, appeared to have been priced in by the market.
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Over the past year, Union’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’ shares were trading 2.2 per cent or S$0.01 higher on Monday at S$0.47 as at 1.53 pm.
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