- In his investment classic, One Up On Wall Street, Peter Lynch expounds on how he seeks out boring stocks with dull names for superior returns. “A company that does boring things is almost as good as a company that has a boring name, and both together is terrific.” His reasoning: The lack of glamour repels momentum chasers, so the acute trader can buy at a discount.
- Small Market capitalized companies – Lynch loved small emerging businesses with strong balance sheets,. He argued “Big companies don’t have big stock moves you’ll get your biggest moves in smaller companies.”
- Dull names, dull products, dead industry – Lynch loved good managements in simple mundane, colorless businesses. His arguments were that nobody creates excess capacity in dull boring industries and when you can find a winner there it makes sense to jump in.
- Fast growers – Among Lynch’s favorites are companies whose sales and earnings are expanding 20% to 30% a year. He cautions investors from looking at companies that grow more then 30% every year. Companies growing at 50% to 100% are bound to falter and crack. It is therefore imperative to view very high growth ideas with a sense of suspicion.
- The simpler it is, the better I like it.
- Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion and so forth.
With these in mind, let’s look at 3 companies (Colex Holdings Ltd, 800 Super Holdings Ltd & ISOteam Ltd) which I feel satisfy in some ways Lynch’s above criteria. FYI, I am currently holding stocks of ISOteam Ltd only. Colex Holdings Ltd was listed on the SESDAQ (now known as Catalist of Singapore Exchange Securities Trading Limited) in April 1999. The Company is a provider of waste management services, namely, waste disposal services to commercial, industrial and residential properties and other waste disposal related business. 800 Super Holdings Ltd is engaged in providing environmental solutions, to the public and private sectors in Singapore. It operates two materials recovery facilities with a total daily processing capacity of 50 tons of recyclable materials. The three services of the Company include Waste Management and Recycling, Cleaning and conservancy, and Horticulture. Waste management services include providing residential, commercial and industrial waste collection services, as well as recycling services. (read here) ISOteam Ltd was listed on the Catalist Board of the SGX-ST (Ticker: 5WF) on 12 July 2013, and is involved in the building maintenance and estate upgrading industry in Singapore with over 15 years of Repairs & Redecoration (“R&R”) and Addition & Alteration (“A&A”) experience.
Let’s look at their financial figures (see below): Stock price charts below: I would like to consider the following in terms of priority: Trailing PEG, EPS (5 yrs growth rate), Return on Equity (5 yrs average), Gross Margin (5 yrs average), Price to book, Quick Ratio (MRQ) & Total Debt to Equity (MRQ), P/E ratio and dividend yield. 1) PEG (Price-to-Earnings/Per cent growth):
1) Trailing PEG
- Colex Trailing PEG: 11.34/(24.66+1.754) = 0.43
- P/E: 9.60, 5 years EPS growth rate: 24.66, Dividend yield: 1.754
- 800 Super Trailing PEG = 10.27/(21.09+1.923)=0.45
- P/E: 10.27, 5 years EPS growth rate: 21.09, Dividend yield: 1.923
- ISOteam Trailing PEG: 11.34/(20+1.724) = 0.52
- P/E: 11.34, 5 years EPS growth rate: 20 (estimated, not from ft.com), Dividend yield: 1.724
2) EPS (5 yrs growth rate): Colex has the highest among the 3, at 24.66.
3) Return on Equity (5 yrs average): 800 Super has the highest at 23.74.
4) Gross Margin (5 yrs average): Colex has the highest at 61.77.
5) Price to Book ratio: Colex has the lowest among the 3.
6) Quick Ratio (MRQ) & Total Debt to Equity (MRQ): ISOteam has the lowest at 1.89 & 18.78
7) P/E Ratio: In gist all their PE ratio is relatively low (not much difference). And it is worth considering buying despite the run-up in prices. 800 Super has the lowest (marginally).
8) Dividend yield: As these are primarily small and growing companies, the yield is small. Among the 3, 800 Super has the highest yield at 1.923.
Base on the above Colex would have been the best among the 3.
Let’s look at their intrinsic value. First let’s look at their estimated 5 years earning growth. We are going to use a time-frame of 5 years from now for this purpose. Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula. (actually I just got the results after keying in the figures in this website :P) F = P(1+R)N where:
- F = the future EPS
- P = the starting (present) EPS
- R = compound growth rate
- N = number of years in the future (5)
Estimated future EPS: Estimated PE: Next let’s look at historical P/E ratio of the 3 companies (see below). Base on the above, I will be estimating the PE of Colex, 800 Super & ISOteam to be 8, 7 and 8.
See below for calculated intrinsic value of each stock vs current stock price. Looking at the above, only Colex‘s intrinsic value is less than the current stock price.
Now, let’s think about the narratives of the growth prospects for these companies.
I have came across this internet discussion forum on Colex (here). Find the below comments which I think are worth considering:
- Net Profit’s CAGR outpaced expenses in a time of inflation, a hallmark of management’s ability to control costs. This is evident by looking at their increasing net profit margin.
- Waste management business is set to grow with increased population and development of Jurong (Colex’s terriority)
- No debt. Potentially a cash cow as cash flow is able to support business needs. 800 Super’s debt increased from $5.6mil to $28mil (FY2011 – FY2014).
Let’s move on to news about 800 Super. (In general similar to Colex, being in a defensive but high capex industry).
- Distinct advantage of already having two Material Recovery Facilities (MRFs) with a third in the pipe-line, to capitalise on the trend of the shift towards recycling.
- Memorandum of Understanding signed with a company in China/ Middle East – potential for growth.
Lastly, let’s take a look at news about ISOteam.
- ISOteam Ltd was incorporated in year 2013 to consolidate its 5 subsidiary companies under a single corporate parent to achieve seamless integration of management control and expertise, and to align the group businesses toward the company’s vision. (read here)
- Shortly after being listed, ISOteam went on a buying spree in Oct 2014 (read here). The companies are related to the businesses which ISOteam is in, and base on their past profit, these companies should contribute positively to their earnings.
- ISOteam is already a market leader (read here and here) position in this growing defensive industry, and has been aggressively expanding (including expanding into the private sector). However they have a short listing history (in SGX) and only time will tell if they can continuously perform well.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett
However, at current prices for these 3 companies, there is little margin of safety. Nevertheless, with high growth companies, the current stock price would probably be a fair price.
Let’s take a peek into the management remuneration.
Colex Holdings Ltd:
- Group operating profit before tax increased by 37.77% from S$2.28 million in FY2012 to S$3.13 million in FY2013.
- MR. DESMOND CHAN KWAN LING is a Director of Colex and oversees all key matters of the waste management division.
- MR. DING CHEK LEH is a Director of Colex since March 1999. He is also the Director in charge of the operations of Integrated Property Management Pte Ltd (“IPM”), a subsidiary of Colex.
800 Super Holdings Ltd:
- In FY2014, revenue increased by 17.9% to S$115.0 million and net profit after tax improved by 57.1% to S$9.1 million from the financial year ended 30 June 2013 (“FY2013”).
- Mr Lee Koh Yong is one of the co-founders of the Group and was appointed to the Board as Executive Chairman on 11 April 2011.
- Mr Lee Cheng Chye is one of the co-founders of the Group and was appointed to the Board as Chief Executive Officer on 9 June 2011.
- Gross profit rose 64.7% to $13.5 million in FY2014 compared to $8.2 million in FY2013.
- DAVID NG CHENG LIAN: Executive Chairman and Founder.
- ANTHONY KOH THONG HUAT: CEO, Executive Director and Founder.
Among these 3 companies, ISOteam has the highest gross profit. However, the total remuneration of ISOteam’s David Ng and Anthony Koh respectively is less than $750,000.00. Which is also less than that of 800 Super’s Mr Lee Koh Yong & Mr Lee Cheng Chye respectively.
Nevertheless, 800 Super’s Mr Lee Koh Yong & Mr Lee Cheng Chye’s remuneration has the highest percentage of variable or performance related income/bonus.