Lack of pricing formula, high debt hamper Laugfs 2Q

Laugfs Gas PLC became a victim of higher interest rates and rapid increase in global Liquefied Petroleum Gas (LPG) prices as the energy group, which has diversified interests, could not pass the higher prices on to the consumer.

According to the interim financial accounts for the September quarter (2Q18), Laugfs Gas reported 10 cents a share or Rs.40.3 million net profit compared to 70 cents a share or Rs.269.4 million in the same period last year.

The company blamed the absence of an energy pricing formula for the shifting fortunes.

“While the international prices of LPG have been rising sharply since October 2016, domestic gas prices, which are regulated in the country, have not been adjusted accordingly in the absence of a pricing formula. 

This has significantly eroded the short-term profitability and shareholder value of the group and the company has already made representations to the relevant authorities to rectify the situation with a long-term sustainable solution,” the company said in an earnings release.

Although the group revenue rose by 49 percent year-on-year (YoY) to Rs.6.4 billion for the quarter under review, the cost of sales rose by a sharp 73 percent YoY to Rs.4.9 billion, resulting in a flat gross profit.

The group spent Rs.386.2 million for sales and distribution, an increase of 59 percent YoY.
Meanwhile, the group paid Rs.566 million as finance cost compared to Rs.319.6 million YoY.
While the higher interest rates remain a concern, a massive debt pile will weigh on the group unless the group succeeded in getting a price revision or shorten the gestation period of its recent investments.

The group accumulated a significant debt pile as a result of its aggressive expansions, mainly in the LPG sector.

“Nevertheless, we are confident that our strategic direction and the timely investments will steer us towards vigorous growth within the planned timeline,” Laugfs Gas Group Managing Director Thilak De Silva said.

However, both short and long-term borrowings of the group rose by a whopping Rs.8.0 billion during the 12 months to September to Rs.22.1 billion.

The group borrowings are now thrice the shareholder funds, which is at Rs.7.2 billion.

Meanwhile, the group paid Rs.1.1 billion as finance cost for the six months ended in September 2017, doubling from the same period in 2016.

Laugfs Gas in 2015 acquired Petredec Elpiji Ltd in Bangladesh and established Laugfs Gas (Bangladesh). The investment is yet to make a return.

The investment on an LPG import and export terminal in the Hambantota port is expected to make a return from the 2H18 onwards, the company said.

In January 2017, Laugfs Maritime purchased its third LPG vessel ‘Gas Courage’ in order to strengthen the “LPG fleet to support the fast expansion of Laugfs’ LPG downstream activities in Sri Lanka and Bangladesh and to cater to the growing demand for LPG across the region”.

Meanwhile, for the six months ended in September, the group turned a net loss of Rs.415.4 million from a net profit of Rs.295.2 million YoY.

The domestic energy business turned a loss of Rs.675.4 million from a net profit of Rs.220.8 million YoY while the overseas energy business made net profit of Rs.132.5 million compared to a net profit of Rs.227.5 million YoY. 

The group’s leisure and hospitality business saw its losses widening to Rs.194.8 million from Rs.148.3 million as the heavy borrowing cost weighed on the performance.

As at September 30, 2017, the Employees’ Provident Fund held a 17.28 percent stake in the group being the second largest shareholder.