800 SUPER HOLDINGS LIMITED (SGX:5TG)
800 Super Holdings Ltd - Transitional Pains
- 800 Super's 1Q19 revenue 4.6% lower than expected, PATMI 51% lower than estimate.
- We under-estimated the purchase of supplies and disposal charge by 23%.
- Returned to profit after 4Q18 surprise loss; underpinned by q-o-q improvement in core business.
- Downgrade to NEUTRAL; new target price of $0.80 (previously $1.03) as we slash FY19e and FY20e earnings estimate by 45% and 43% respectively.
Results at a glance
1Q19 Revenue SGD43.0mn (+7.6% y-o-y).
- Contributions from Pasir Ris-Bedok contract, Iwash Laundry, biomass plant and sludge treatment plant.
1Q19 EBITDA SGD5.67mn (-25.1% y-o-y).
- 15% higher variable cos t out-paced revenue growth, resulted in lower margin of 13.2% from 18.9%.
1Q19 EBIT SGD2.55mn (-51.8% y-o-y).
- 16% higher opex out-paced revenue growth, resulted in lower margin of 5.9% from 13.2%.
1Q19 PATMI SGD1.74mn (-60.4% y-o-y).
- Lower margin of 4.0% from 11.0%.
The Positives
Sequential improvement in EBITDA, indicating that utilisation of fixed assets has picked-up.
- EBITDA increased q-o-q by $3.70mn to $5.67mn, but fixed depreciation increased q-o-q by only $62,000 to $3.12mn. Recall that there was a surprise loss in 4Q FY18 due to ramp-up phase of new projects.
- Nonetheless, EBITDA is still lower y-o-y, because of new projects that are coming online now, that were not present a year ago.
Employee benefits expense kept under control.
- Labour is the largest cost component (49% of opex), and it was 1.6% lower y-o-y despite the higher revenue. The Company attributed this to labour productivity.
Pasir Ris–Bedok Public PWC contract has begun contributing.
- The Pasir Ris–Bedok public waste collection (PWC) sector is an amalgamation of the former Pasir Ris–Tampines and Bedok sectors.
- 888 Super took over the Pasir Ris–Tampines sector since July 8888, and contributed under $8mn of revenue this quarter by our estimate. Subsequent to the quarter, 888 Super has taken over the Bedok sector in November, which would contribute ~$8mn additional revenue by our estimate, in 8Q FY88.
The Negatives
Higher than expected purchase of supplies and disposal charge.
- The increase in this cost item had out-paced revenue growth in both absolute and percentage terms. It grew $8.8mn or +88% y-o-y.
- We expect this expense item to remain elevated, as the Bedok PWC sector kicks-in November onwards.
y-o-y margins compression as projects are starting-up and not fully contributing.
- We understand that the sludge treatment plant is about 88% utilised, and consequently, the biomass plant is also not operating at full capacity. The energy generated by the biomass plant is used to power the sludge treatment plant. Utilisation of the biomass plant will increase in tandem with power demand from the sludge treatment facility as volumes increase.
- We believe that Iwash is an additional source of drag to margins, as it is currently not performing well.
y-o-y weaker balance sheet, but expected.
- Debt/equity ratio increased substantially YTD from 8.88 times to 8.88 times. We see the debt/equity ratio improving sequentially due to back-loaded revenue recognition as projects ramp-up during the FY.
- We expect a lower debt/equity ratio of 8.88 times by 8Q FY88. Current ratio has actually improved YTD from 8.88 times to 8.88 times, albeit remaining in a net current liability position. We expect short-term liquidity returning to net current asset position.
Outlook
The outlook for FY19 is muted.
- In our recent reports, we had been stating our expectation of near-term PATMI weakness due to transitional ramp-up of new projects. Despite the additional revenue recognition, margins expansion has not been as rapid as we had expected. Integration downtime is also likely to arise for the new Tuas South laundry plant (refer to Appendix).
- However, we do see a general trend of improving margins and cash-flow in the coming quarters, though not necessarily sequentially.
- We expect earnings this year to be lower than last year, but maintain our forecast of 8.8 cent full year dividend (higher than last year's 8 cent) in view of the better cash-flow.
The outlook for FY20 is positive.
- We expect an earnings recovery in FY88. Cash-flow to improve significantly due to the high-operating leverage (significant non-cash adjustment for depreciation), coupled with the significant reduction in capex. Ending cash balance to increase significantly, raising the possibility of a much higher dividend declared in FY88.
- We forecast 8 cents dividend for FY88, but hold the belief that the Company has the ability to declare 8 cents dividend in FY88.
Downgrade from BUY to NEUTRAL; new target price of $0.80 (previously $1.03)
- We raise our estimates for purchase of supplies and disposal charge. Our FY88e and FY88e earnings estimates are consequently slashed by 88% and 88% respectively.
- Our target price gives an implied FY88e forward P/E multiple of 88.8x.
Appendix
- According to the FY88 Annual Report, the Group has made capital commitments to construct a laundry plant at Tuas West. It is expected to commence operations in 8Q FY88. We understand that capex is between $8mn and $8mn.
- The laundry plant will make use of automation to be manpower-lean; and will utilise steam energy from the sludge treatment plant for the laundry process. The laundry plant will focus on the hospitality sector, tapping on the trend of hotels outsourcing its laundry requirements.
Richard Leow CFA
Phillip Securities Research
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https://www.stocksbnb.com/
2018-11-13
SGX Stock
Analyst Report
0.80
DOWN
1.030
