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 straight forward.

“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 market capitalisation 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 business.

  • 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.

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.

Book3

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 mil but a debt of 34.8 mil (so after subtracting cash, it has a net debt of 29.5 mil! Whie Colex has a net cash & equivalent of 1.4 mil). 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.

2

“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):

1

Colex’s net income over the years show a more consistent growth. 800 Super’s annual net income results are more lumpy (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 more less than 1).

2) I did a study on 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, 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 terriority)

For 800 Super:

  1. 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.
  2. Memorandum of Understanding signed with a company in China/ Middle East – potential for growth.

map

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.

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat.
This entry was posted in 800 Super, Colex. Bookmark the permalink.

13 Responses to Comparison between 2 obnoxious companies

  1. Letgetrichtogethersg says:

    Hi, I read your recent Colex articles with great interest. Never knew about this business until I came across your blog.

    Colex also seemed to have a great balance sheet, with solid fundamentals and good track record. The price is also fairly so. The only downside is the super low trading volume.

    It’s quite difficult to purchase anything eh? Are you vested yet?

    Like

  2. JS says:

    Thank you so much for your detailed analyst.

    Like

    • mslee888 says:

      hi, enjoy your detailed analysis. I would like to know for PEG calculation, why do you factor in dividend yield? How do you work out the eps growth growth…is it you compare the eps in 2010 with 2014? for example, If a company has any -ve eps within the 2 periods, is the eps growth still reliable?

      for 800 super, setback is the debt level. But their net margin is better than colex, meaning somehow their cost controls or work processes are better.

      Still, its a very insightful analysis from you. Thanks!

      Like

      • apenquotes says:

        On why I add dividend yield in PEG calculation, please read here. Under the portion “Best Uses for the PEG”.

        I get the EPS growth rate in ft.com eg. click here. Under “EARNINGS PER SHARE”, there is EPS growth(5 years) which is 25.11.

        Well, actually the best CAGR (Compound Annual Growth Rate) of EPS is over longer periods of say 10 yrs. It sort of even out any odd years’ performance. However, this data is hard to get. So the next best figure is 5 years EPS growth rate. Well, in any estimation there is always a certain degree of uncertainty (so remember to have some buffer – the more volatile the company’s performance, the bigger the buffer in your assumption). However it also depends on what kind of company you are researching. There are companies with very lumpy EPS results every year (no consistency, and values fluctuates wildly – esp for cyclical companies) – so this method may not work.

        I do agree, that 800 Super may have better cost controls or work processes . It really depends on what you place first. They are many different metrics to gauge a company – to me, my priority (or rather one of the top three) is debt level. I think of the downside risk first before anything else. I play defense more than attack. The company must first be able to survive a crisis. And I have to convince myself not to sell when the worst happens, when share price dropped by a lot or market crash – I can still tell myself that a company with high cash level is very very very hard to topple, and is still earning some profit.

        Read here.
        Warren buffet does not directly look for guarantee of high returns. Rather he focuses on reducing downside risk (reducing probability of loss). If downside risk is reduced in all the investments for a long period of time, then upside is guaranteed.

        Like

  3. k says:

    Great stuff here!

    Like

  4. Pops says:

    Thank you for your excellent articles.
    My concern about Colex is that it has a very low free float of 12.8%. Low liquidity works both ways. If you already own shares and you need to sell, it may be difficult to find a buyer at a good price.
    The more worrying problem is how easy it is for the majority shareholder to privatize the company. This is typically done during a market downturn at a low price, forcing the minority shareholders to realize their losses even though they may have holding power.

    Like

    • apenquotes says:

      My mentality in investing is that I hope to own shares which I don’t have to worry about. And hopefully never sell them. In simple terms: My first thought is to find companies so I don’t have to sell, rather than how to sell when there is a crisis.

      Some of the better companies if you noticed are very illiquid eg. Vicom, Spindex and Colex.

      Agree with you, illiquid shares can work for and against you. There tend to be a premium in price for illiquid share over their liquid counterparts (esp. for good companies), and it keeps institutional investors with big budgets (and frequency traders / speculators) out. The downside is like you said, hard to sell.

      In his 1988 letter to Berkshire Hathaway shareholders Buffett said: “Our goal is to attract long-term owners who, at the time of purchase, have no timetable or price target for sale but plan to stay with us indefinitely. We don’t understand the CEO who wants lots of stock activity, for that can be achieved only if many of his owners are constantly exiting. At what other organisation – school, club, church, etc – do leaders cheer when members leave?”

      Like

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  6. f00jh says:

    Hi, thank you for the great analysis.

    Colex does seem to be a good company with solid fundamentals. However, in terms of future growth, other than the Jurong narrative, I’m not sure whether it has any other growth potential. Would you happen to know the contribution from Colex’s various business segments? 800 Super gives me the impression that it has a more diversified business that does not just solely rely on public waste disposal.

    Like

  7. bobby says:

    Just founded your blog, i bought into Colex last year too. After comparing 800 super and it. To think we both think on the same line. Lets hope your trade will earn it.

    Like

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