800 Super Holdings limited & Nera Telecommunications Ltd

Singapore’s Straits Times Index on 23 Jan 2014 hit 3,412.08, the highest since May 2013. With the markets in South East Asia up on ECB stimulus, the mood recently has been buoyant.

I have not been buying any shares recently and am surprised with CapitaLand sudden surge up in price (it is one of the stock in my portfolio).

As mentioned in my earlier post, I intend to slowly up my cash quota. In the meantime, I am taking some time aside to study some companies (I am not thinking of purchasing any stocks at the moment given the increase in prices recently).

Two companies are of particular interest to me currently, though they are very dissimilar (not really comparing apple to apple here): 800 Super Holdings limited & Nera Telecommunications Ltd. Both to me seems to be high growth companies, albeit with contrasting business narratives.

Nera Telecommunications Ltd: A company that works in the area of satellite communications and transmission products & systems.

800 Super Holdings Limited: An environmental services provider that deals with waste management, cleaning and conservancy, and horticultural services for both the public and private sectors in Singapore. It is among the three locally listed waste management companies.

 

First let’s look at their financial figures. ROE (Return on Equity): Both companies have high ROE (800 Super: 23.64%; Nera: 25.96% as shown in ft.com or 35.55% as shown in Wall Street Journal).

Total Debt to Total Equity: Here Nera shines – NIL (as shown in Wall  Street Journal). 800 Super is 83.91. Current ratio for liquidity for Nera & 800 Super is 1.68 vs 1.90. NeraTel is a cash cow.

Low EV/EBITDA for Nera & 800 Super which are at 9.85 & 8.23 respectively.

Price to book: Nera is 3.86. 800 Super is 1.14.

P/E ratio for Nera and 800 Super is 18.04 vs 10.27 respectively. Low P/E for 800 Super -probably due to its low profile among analysts.

The Graham in me would be in a bit of dilemma. On one hand, Nera has zero debt, but at the current price to book values and P/E ratios, 800 Super would look relatively attractive. I reckon it is due to the fact that 800 Super is relatively unknown compared to Nera.

The Buffet in me would like their ROE (however, that is if the averaged ROE is at least 15% over the past decade).

The EPS growth rate (5 yrs) for Nera and 800 Super is 18.21 & 21.09 respectively. Respectable EPS growth rates for companies of these sizes.

These 2 companies were involved in the provision of routine, regular tasks that were non discretionary in nature. The Peter Lynch in me would like both companies due to their small size and high growth. And in particular 800 Super due to its unloved, out of favor business with strong fundamentals. Currently, few analysts have picked up on 800 Super. Well, 800 Super’s business may not necessarily be non discretionary as the company’s major customer is basically the Government of Singapore (about 40% revenue from govt), and any changes in policy could be felt immediately eg. worker levy.

The free cash flow of Nera appears to be healthier. In addition, Nera stock will be considered as a high yield stock. Annual Dividend yield for Nera and 800 Super is 7.8% and 1.92% respectively. However, the main question is whether Nera can continue the high dividend yield forward (lacklustre sales performance is due to lumpy project recognition in Morocco for telecom segment and delay in customer order in network infrastructure segment).

 

Moving away from the figures. Let’s think about the narrative / story behind each of these companies.

Nera Telecommunications Ltd with a market capitalisation of around S$285 million accounts for over half the market in the SE Asia. Nera links its clients up with satellite, microwave and radio frequency communications. Its customers span the length and breadth of Asia and South East Asia. They include countries such as Myanmar, Vietnam, Thailand and Malaysia.

800 Super Holdings on the other hand is one of the four licensed public waste collectors appointed by the National Environment Agency in Singapore. In terms of scope for expansion, it would pale in comparison to Nera. However, I found this interesting forum discussion about 800 Super. Basically 800 Super(Singapore’s Largest Home Grown Private Waste Disposal Company) is starting from a very low base as compared to its major competitor Sembawang Corporation , and given the fact that Sembawang Corporation is a GLC loaded with corporate overheads, 800 Super (being a well run small-cap company) could slowly chip away the pie from Sembcorp.

Steve and Mark are camping when a bear suddenly comes out and growls.

Steve starts putting on his tennis shoes.

Mark says, “What are you doing? You can’t outrun a bear!”

Steve says, “I don’t have to outrun the bear—I just have to outrun you!”

Nera is highly efficient in the use of its assets to generate sales. Its payment solutions business is growing. Nera’s payment solutions are easy to scale. 800 Super on the other hand has tight competition in the market and has to manage an increase in costs due to higher worker levy and wages. That is not to say Nera  has no tight competition, (note: decline from the telecom segment) but at the very least, it takes less effort for NeraTel to leverage  on the scaling of payment solutions while not being tied down by higher worker levy issues as compared to 800 Super (which is in a more labour intensive industry).

On another note regarding circle of competence: Waste management is after all an enduring business, despite its heavy reliance on capital equipment. We can all relate to its business model (of waste management, cleaning and conservancy),  satellite communications and transmission products & systems on the other hand would be a tad difficult to comprehend (esp. to me who is not in this industry). Would you feel more comfortable putting money into something as tangible as waste management, cleaning & conservancy or something as intangible / cutting edge as satellite communications and transmission products & systems? The Buffett in me would choose the former. How different would the technology for waste management be 5 or 10 years from now? Not much I reckon (even with the stricter requirements for recycling, manpower etc). The future for satellite communications and transmission products & systems on the other hand would be more difficult to foresee.

 

The narratives for both these companies are not perfect, and no one can be certain that they will be around in the next 10 – 20 years.

However, at the moment their fundamentals are not bad (with an impressive run-up in stock prices as well), and if there is a dip in price, they are worth a second look.