August 23, 2020

People Cook More, but in Hotels and Restaurants Consumption Returned to only 60% -70%

Supergas ended the second quarter with a 33% increase in net profit, but with a decrease in revenues ■ Supergas’ CEO: "We are a ‘stepson’ at Azrieli"

"Supergas (-0.68% 8870) currently interests its owners, Danny and Mikey Salkind, much more than in the period it was controlled by the Azrieli group - and that's for the better. At the Azrieli group, we were a stepson, whereas with the Salkinds, Supergas is a full-fledged company, "says Kfir Navon, CEO of Supergas Energy.

On Sunday, Supergas published its first financial statements as a public company. The company reported a 33% increase in net profit in the second quarter of the year compared to the corresponding quarter in 2019 - to NIS 12 million. In the first half of the year, net profit increased by about 5% compared to the corresponding period - and amounted to NIS 41 million. The growth was recorded due to an increase in the quantities of LPG (cooking gas) sold to households - and offset the weakness in sales to the institutional market - and despite the decline in sales prices of LPG and natural gas, as a result of the decrease of fuel prices. The company will distribute a dividend of NIS 24 million.

Supergas is engaged in marketing energy substitutes - such as LPG, natural gas and compressed natural gas - used to operate burners in industry, to operate stoves, to heat institutions, and for household cooking and heating. In addition, in the past year, Supergas has begun initiating projects for the construction of cogeneration plants, which are fed with natural gas, at industrial customers (in franchises), for the purpose of generating electricity and thermal energy. The company reported a 10% decrease in revenue in the second quarter of the year compared to the corresponding quarter in 2019 - to NIS 120 million.  According to Navon, the decline in sales was due to a decrease in quantities purchased by commercial consumers such as hotels, restaurants, cafes and gyms, due to the corona pandemic. "Some customers stopped buying LPG entirely in the second quarter, and others significantly reduced purchases. At present, institutional market consumption has returned to 60% -70% compared to the pre-corona period. In addition, sales turnover was due to the decrease in the price of oil, which has two effects. In the natural gas sector, the sale price to customers and the purchase price are affected by the oil price, because usually contracts are linked to it. Due to the decrease in fuel price, we reached bottom contract prices.  In the field of LPG, the price of energy affects the purchase of gas from the refineries - and, accordingly, also the sale price to customers. "

The Supergas IPO

Supergas completed an initial public offering (IPO) about two months ago, in which it raised about NIS 270 million, at a relatively high value of NIS 872 million (pre-money). The offering was an achievement for the Salkind family, as it had acquired Supergas from Azrieli a few months earlier, at a value lower by half. Shortly after the IPO, Supergas raised another NIS 210 million in bonds.

Supergas after the IPO became a liquid company. The proceeds that were received are estimated at about NIS 600 million, including NIS 45 million received from the exercise of stock options by The Phoenix (which holds approximately 6.8% of Supergas) and NIS 50 million held as security for a series of private bonds previously issued by the company and repaid from the IPO. As of the end of June, the company has a liquidity balance of approximately NIS 350 million.

"Raising the bonds allowed us to replace an old debt, for which we paid index-linked prime interest plus 4.9%, with a cheap debt. The IPO has helped strengthen the company's financial position, and has a tremendous impact; Previous financing expenses have put a heavy weight, so the IPO has freed up the company. We have seen it already this quarter - and we will see it in the coming quarters as well. The company now feels free and is free to run in any direction without financial restrictions", Navon said.

Reducing Leverage and Expanding Activity

Revenues Decreased – But Profits Increased

A significant portion of the proceeds of the IPO was used by Supergas to reduce leverage, which arose following a debt that the Salkind family imposed on the company when it acquired it from Azrieli. Another part of the proceeds will be used by Supergas to expand its activities in the field of power plants - the engine of growth for the coming years. As part of the activity, Supergas is building power plants for customers, and then sells to them electricity for periods of 15-20 years.

Navon told us of plans in that sector: "So far we have reported seven agreements for the construction of power plants, which are already operating projects. The power plants are being built at our expense, and then we sell the electricity at a big discount, relative to the private power producers’ prices. Customers also get a discount on the steam we produce. We expect to complete the construction of seven stations, with a capacity of 20 megawatts, by the end of 2021. Two stations will start operating this year."

In addition to building power plants, Supergas recently signed a strategic partnership with the cleantech company Augwind, which developed compressed air storage systems. Supergas obtained the exclusive license in Israel for the AirSmart energy systems, which is sued for energy efficiency and power saving.  “We market the AirSmart system to our customers in the sectors of natural gas and cogeneration, as well as to entities that are not our customers. We hope to sell dozens of such systems in the coming years. In this case as well, our plan is to fund the installation of the systems at our expense, and sign long-term agreements with customers. The customer will pay us for the energy savings or according to another mechanism. In fact we sell compressed air at a discount on the current price of one cube air", says Navon.

Market Competition is Fierce and Increasing

Supergas' IPO has revealed the high profitability environment in which domestic gas companies operate, against the background of low competitiveness in the industry. Today, the domestic gas market is controlled by three large suppliers, which hold 75% of the market, and is characterized by harsh competition barriers, which already led to another cartel affair (and to convictions) about 15 years ago. During the second quarter of the year, Supergas' profitability amounted to about 10% (of revenues), in the first semester of the year its profitability was 13% and in 2019 - 12%.

"There is regulatory pressure all the time, but I do not notice any particular pressure in the area of competition", says Navon.“  Competition in the LPG market is fierce and increasing. Our profitability is fine, but the business is complex and full of risks, and there are also businesses with higher profitability rates. The LPG business is not simple at all; There are regulatory constraints that are not related to money, but to safety and engineering considerations. Here the regulation plays between maintaining the safety of the industry and the desire to allow high competition. The legislation today produces a good balance."

What will you do if they will close the Bazan Refineries in Haifa in the future?

"If the refineries stop or reduce LPG production in five or ten years - then we will import more. The effect will not be substantial. Today, we import about 20% LPG from external suppliers, because there is a shortage in Israel in the winter. The LPG comes from Turkey, which is the regional hub. "The source of the LPG in Turkey is in the Black Sea, in the North Sea and now it arrives to Turkey mainly from Tunis."

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