Thursday, October 21, 2010

Sri Lanka gas demand on the rise, say IPO promoters

Oct 21, 2010 (LBO) - Sri Lankan liquid petroleum gas supplier Laugfs Gas is raising 2.5 billion rupees to settle debt, expand facilities and also enter property development as the country recovers from a war, its promoters said.
The initial public offer opens on November 04, 2010 with the minimum subscription set at 100 shares. The 22 percent stake is to be listed on the second board of the Colombo Stock Exchange.

The firm is offering 75 million voting shares at 23 rupees each and 52 million non-voting shares at 15 rupees each.

Laugfs group profits had increased to 527 million rupees, up from a profit of 243 million rupees the year before, according to the prospectus.

The firm will have 387 million shares in issue after the public issue.

Aggressive Forecast

Deshan Pushparajah of Capital Alliance, one of the joint placement agents for the issue, said they forecast Laugfs will make a net profit of a billion rupees in the 2011 financial year, which is double that of last year which will give a forecast earnings per share of 2.75 rupees.

The financial statements of the Laugfs group for the 2009-10 financial year have been qualified by auditors.

This was with regard to deferred cost of sales, where the management has deviated from normal accounting rules, which resulted in an increase in the stated profits, according to the prospectus.

Laugfs has also reduced the time of recognizing cylinders into revenue from 10 year to 5 years. It has launched an aggressive cylinder sales strategy with discount to the main competitor to increase market share.

Market Growth

Laugfs has a 28 percent share of the total LPG market which it aims to increase to 50 percent in the next two years.

Gas sales grew at a cumulative annual growth rate of 14.3 percent in the last five years to 47, 388 metric tonnes in 2009.

The prospectus attributed the growth to penetration of competitor market share, pricing strategy and gradual growth of the industry.

However, the prospectus warned, price sensitivities and availability of substitutes have been the key concerns which may impact on Laugfs in future.

Pushparajah said accelerating economic growth will lead to a wealthier population and rising demand for LPG.

Greater household income will enable lower income consumers to shift their cooking fuel from wood and kerosene to LPG.

Only about a quarter of the population now use LP Gas.

Growth in industrial production and the tourism sector, which is booming after the end of the island's 30-year ethnic war in May 2009, is expected to drive demand for industrial gas.

The end of the war opens up Sri Lanka's east and north to LPG distribution for household cooking.

The company will use part of the IPO proceeds to expand its storage and distribution network.

Regulated Pricing

Pushparajah said Laugfs is assured profit margins under a pricing formula guaranteeing a 30 percent margin on landed cost to the firm.

Pricing is regulated by the Consumer Affairs Authority with the maximum retail price of a 12.5 kilo cylinder revised every two months based on information provided by suppliers.

The market price could drop sharply if the government lifts the "cost-plus 30 percent" LPG pricing rule.

However, the pricing formula is under sanction of the supreme court and under the current duopoly environment with the only other player being Shell's local unit, price wars are unlikely, Pushparajah said.

Both players enjoyed good profit margins even before the price formula was introduced, he said.

Laugfs gets 55 percent of its LPG requirement from the international market at spot prices and the balance 45 percent from the refinery owned by the state-run Ceylon Petroleum Corporation.

Laugfs currently has exclusive rights of procuring the entirety of LPG produced by the CPC refinery, which if ended, could raise the firm's costs resulting in a narrowing of profit margins.

The supply deal with the CPC is also under an order of the Supreme Court and Laugfs also relies entirely on imports, with little impact on margins, during regular CPC refinery shutdowns for maintenance.

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