FESCO is set to enter the liquified petroleum gasoline (LPG) market by the middle of this year, after successfully raising $700 million from a recent bond offer to fund the ambition.

The petroleum marketing company which has 18 branded petrol service stations across the country is aiming to be one of the select LPG distributors in Jamaica. Fesco has spent $870.67 million in the first six months of its 2023 financial year (FY) on growing its service station network and LPG entry.

“For the gasoline in your car, everybody’s car has a gas tank. For the LPG market you have to have the storage for every one of your customers, basically — the company has to go out there and buy cylinders for everybody’s homes. If you’re going to go into it at any scale, obviously, you’re going to need to make a sizeable investment. It takes a lot of capital to establish any significant amount of market share as long as you’re going to do it the right way,” said Fesco Managing Director Jeremy Barnes in an interview with the Jamaica Observer last Thursday.

Its LPG entry is set to take place in the first quarter (April to June) of its 2024 FY. Barnes explained that the development time for the rollout would have been impacted by supply chain disruptions as well.

Despite raising the funds at a higher interest rate of 11.75 per cent, Barnes considers this good when comparing the rates on new placements and that of other entities raising debt in the capital markets. He also explained that cylinders can cost anywhere from $8,000 to $17,000, which in turn means that there is a significant upfront capital cost. This is separate from the trucks, storage tanks and other apparatus needed to successfully operate a business of that nature.

Fesco issued a $1-billion bond at 7.5 per cent last February which was used to prepare its entry into the consumer cooking gas/LPG market and expand its dealership network and service station footprint. That bond was listed on the Jamaica Stock Exchange’s Private Market last April, with the latest bond to be listed on the private market in short order.

Fesco has significantly increased its earnings for the first six months of its 2023 FY as its sales grew 210 per cent to $13.43 billion with net profit climbing to a record $281.08 million — which is more than the $253.64 million earned for the entire 2022 FY. This was driven by the increased quantity of fuel sold and there being no COVID-19 restrictions during the period.

Its Beechwood Avenue location is its only COCO (company-owned, company-operated) location while the remainder are DODO’s (dealer-owned, dealer-operated). Fesco added new DODO locations in July at Whitehall, St Elizabeth and in November at Ocho Rios, St Ann. FESCO – Future Energy Source Company Limited – is primarily a marketing company which buys fuel from Petrojam and sells it at a markup to dealers.

“Yes, we’re doing all those DODO’s and COCO’s but they are at various stages; each project has its own three-year cycle. We have intentions to do four to five stations on both sides within the next 24 months,” Barnes added on the expected timeline for the development of the new locations.

When asked about the need to return to the debt market at this time, Barnes replied, “The world has changed with interest rates. We did want to borrow more at that point in time but you’re restricted by your debt capacity, and your debt capacity is a ratio of the equity in the company relative to the debt you should carry.”

The higher interest rate comes against the backdrop of central banks increasing their policy rates in response to record levels of inflation. The Bank of Jamaica increased its policy rate last year from 2.50 per cent to 7.00 per cent, with its next monetary policy committee meeting set for February 20.

Barnes referenced the fact that the company’s focus on meeting the projections listed in its prospectus from its initial public offering (IPO) is one of the key reasons it has been able to raise the funds to scale its LPG business line. Fesco had projected to earn $11.46 billion in revenue and $361.96 million in net profit for its 2023 financial year. The company’s third-quarter earnings are due by February 14, with its FY ending on March 31.

Fesco introduced Futron 93 gasoline during the third quarter to the market at seven locations across the island. Barnes said that this has resulted in Porsche, BMWs and other high-performance vehicles visiting the stations.

“Well, it is early stages but there’s a lot of buzz around it. It’s a new product, people are trying it and they like it. People are very happy with the price point because, just for a few more dollars, they can get a significant upgrade in performance,” the managing director said.

Fesco has also partnered with TFOB (2021) Limited, which operates the digital wallet Lynk, to be part of its LynkBiz merchant platform. This allows Lynk users to scan a QR code to pay for their purchase at Fesco and other associated businesses currently in the pilot phase. Barnes added that this has been a well-needed solution amid the difficulties associated with supply chain disruptions which limit the number of available point of sale (POS) devices offered by commercial banks.

Fesco’s asset base increased 17 per cent to $3.27 billion over the six months, with non-current assets at $2 billion. Total liabilities and shareholders’ equity closed the period at $2.22 billion and $1.05 billion, respectively. Fesco’s share price increased 89 per cent in 2022 to $5.44 but it has to $4.91 in 2023.

Fesco’s LPG move comes at a time when there have been significant market developments over the last month for LPG-related companies. Regency Petroleum Company Limited listed on the Junior Market of the JSE last month with $30 million allocated to purchase additional cylinders for its LPG business.

This event was then preceded by the announcement that Massy Holdings Limited would be buying IGL (St Lucia) Limited for US$140.3 million. IGL (St Lucia) is the parent company of IGL Limited in Jamaica, which has been a leading distributor of cooking gas for more than 60 years. IGL leads on the packed side of the market while Massy Gas Products (Jamaica) Limited leads on the bulk LPG side.

“We have a lot of plans and a lot of stuff working on while trying to improve the feel and customer experience of every station. It really has been a good year as a lot of the stuff that we’ve done, customers have appreciated and patronised us very well. We hope the same for LPG and we’re working hard on it — and we’re investing on both sides of the business significantly to be able to accomplish our targets,” Barnes closed on the company’s outlook.