Comparison between 2 obnoxious companies

There are three local waste management companies listed in the Singapore Market: Colex Holdings Limited (SGX:567), 800 SuperHoldings Limited (SGX: 5TG) and Sembcorp Industries Limited (SGX: U96). (read here)

I have written about Colex in these posts:

1. Trailing price/earnings to growth (PEG): Vicom, Riverstone, SuperGroup, ISOteam, Colex, Nera Tel & Raffles Medical (read here)
2. Colex Holdings Ltd, 800 Super Holdings Ltd & ISOteam Ltd (read here)
3. Short note on Colex (read here)
4. Colex: PEG and Intrinsic Value and Notes on Annual Report (read here)
5. Colex Holdings Ltd: My most obnoxious stock (read here)
6. Cash Quota & Notes on Colex Annual Report / past records (read here)

One reader has asked me about my thoughts about Colex and 800 Super, and my choice between the two. Before I go into detail, let me briefly explain my thought process among these 3 companies (Colex, 800 Super & Sembcorp Industries).

The waste management business, from my perspective, is dull and un-glamorous. Which is good, cause it does not really attract a lot of attention (esp. from institutional investors). And being in a small confined market like Singapore, it is pretty straightforward.

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” Peter Lynch

Basically, by default, I would not like Sembcorp Industries due to its sheer size and complexity. It has an enterprise value of SGD11.01 Billion and a market capitalization of SGD7.00 Billion and engages in the utilities, marine, and urban development businesses worldwide.

Other things to note about Sembcorp Industries are:

1. Total Cash of 1.60B vs Total Debt of 5.54B (so net debt is 3.94B!!)
2. Current Ratio is 1.1 (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses.)
3. Return on Equity of only 14.15% and Return on Assets of only 3.94% (way below those of Colex and 800 Super)

Like Peter Lynch, I like simple businesses.

• 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 management 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 than 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.

So that basically leaves us with 800 Super and Colex. First and foremost, I think both are good companies. Nevertheless, one of them would have to be better than the other. Now let’s do a comparison with the financial statistics of both companies (Note: information taken from POEMS 2.0) and it would quickly become apparent why I chose Colex.

I feel that in many of the above figures, 800 Super and Colex are quite similar, Eg. EPS growth rate, price to book, PE ratio etc.

What stands out (in which 800 Super is better than Colex) is the ROE (800 Super’s 23.64 vs Colex’s 18.86). However one must note that an increased debt/leverage actually boost ROE (read here and here). The issue with debt is not apparent during boom times or when interest rates are low (like now).  However, during recessions, leverage can result in exponential losses. A large debt burden carries risk because of the reaction of leverage to the prevailing economic conditions. Increased debt favors ROE during boom times but hurts ROE during recessions.

“I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.” Warren Buffett

Consequently, the next item between the two companies is the high level of debt which 800 Super has. It only has a cash & equivalent value of 5.3 mils but a debt of 34.8 mils (so after subtracting cash, it has a net debt of 29.5 mils. While Colex has a net cash & equivalent of 1.4 mils). We all know interest rate is going to rise, it is only a matter how soon and how fast. Similarly, the current ratio and debt to equity ratio of 800 Super is inferior to Colex’s. So financially Colex is in a better position than 800 Super in meeting any crisis.

If we look deeper (see below), we would notice that 800 Super has over the years increased its financial leverage and debt/equity. The trend is likely to continue in the future. On the other hand, Colex has either maintained or reduced.

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,”  Warren Buffett

In terms of growth (see below, information from Wall Street Journal):

Colex’s net income over the years shows a more consistent growth. 800 Super’s annual net income results are lumpier (but nevertheless still increasing).

“Time is the friend of the wonderful business, the enemy of the mediocre.” Warren Buffett

1) Trailing PEG

• Colex Trailing PEG: 9.65/(25.11+1.61) = 0.36
• P/E: 9.65, 5 years EPS growth rate: 25.11, Dividend yield: 1.61

• 800 Super Trailing PEG = 9.07/(21.09+2.2)=0.39
• P/E: 9.07, 5 years EPS growth rate: 21.09, Dividend yield: 2.2

Colex has a slight better trailing PEG (much less than 1).

2) I did a study on the intrinsic value of Colex and 800 Super some time back – should not differ much.

Colex intrinsic value is 0.32, current stock price is 0.31. So current stock price has a discount of 3%.

800 Super intrinsic value is 0.45, the current stock price is 0.46. So current stock price is higher than intrinsic value. So no margin of safety.

But in general, both prices are quite close to intrinsic value.

In terms of narratives/outlook, I feel that both Colex and 800 Super have their own advantages:

For Colex:

1. Waste management business is set to grow with increased population and development of Jurong (Colex’s territory)

For 800 Super:

1. A distinct advantage of already having two Material Recovery Facilities (MRFs) with a third in the pipeline, to capitalize on the trend of the shift towards recycling.
2. Memorandum of Understanding signed with a company in China/ Middle East – a potential for growth.

In summary, financially, Colex is stronger as is has a higher cash to debt ratio and the trend over the year has been improving.

Moreover, Jurong seems to have more potential for growth compared to the mature estates of Ang Mo Kio and Toa Payoh (in which 800 Super is operating in) and there will be future plans for the Jurong area (recently being the high-speed rail terminus, read Jurong East to be terminus for Singapore-KL high-speed rail, and not too long ago – the Jurong Lake District masterplan). These plans are more tangible/foreseeable than the potential growth of 800 Super in China / Middle East.