WITH a high percentage of recurring revenue, waste management companies should be more resilient during economic downturns. Furthermore, their business grows gradually, in tandem with the increasing waste output of the population and the growing awareness about environmental care and protection.
Recent statistics from the Ministry of Urban Wellbeing, Housing and Local Government indicate that Malaysians currently produce 33,000 tonnes of solid waste a day. This is seven years ahead of the earlier target of 30,000 tonnes for 2020.
Despite the defensive qualities and stable growth prospects, these companies appear to have been overlooked by investors due to their unsexy and mundane business models. It was not until last year that these unloved waste management stocks came to investors’ attention (see chart 1). Tex Cycle Technology Malaysia Bhd’s share price started a surge of almost 200% in September last year. Analabs Resources Bhd began its surge last November, AWC Bhd in April this year and Brite-Tech Bhd in May.
Of the eight listed waste management companies, Cypark Resources Bhd is the market leader in terms of market capitalisation, revenue and profitability. Riding government initiatives to develop the local green energy sector, the bumiputera-controlled company envisions itself as one of the leaders in the transformation of the green energy industry.
CIMB Research and Public Investment Bank Research have a “buy” call on the stock, citing its pioneer status in the waste-to-energy (WTE) business and the potential to secure more renewable energy (RE) projects moving forward.
The company is currently constructing the country’s first WTE plant in Ladang Tanah Merah, Negeri Sembilan. Targeted to be completed in 2017, the plant will exclusively process most of the waste generated in the state for the next 25 years. Based on its input capacity of 1,000 tonnes per day and design capacity of 20mw, Cypark estimates that the plant could generate annual revenue of more than RM80 million.
Another bumiputera waste management company is AWC Bhd, which derives a stable and recurring concession income for maintaining government buildings in the southern region of the peninsula and Sarawak. Although facilities management accounted for 58% of its revenue in the financial year ended June 30, 2015 (FY2015), waste collection system management contributed about two-thirds of its operating profit.
Earlier this year, its concession was renewed for 10 years at RM52 million per annum for the first five years. AWC was also given a RM145 million critical asset refurbishment programme concession at RM14.5 million per annum for 10 years. Moving forward, AWC plans to reduce its reliance on government-linked projects by expanding its waste management in the plumbing and rainwater harvesting segments.
The first waste management stock that saw a surge in share price is Tex Cycle Technology Malaysia Bhd, buoyed by its new waste plant that started operations last year. The company is reported to have plans to launch its maiden venture in the overseas markets next year, particularly in Southeast Asia.
In August, Tex Cycle obtained approval from authorities to build and operate a RE power plant with a capacity to supply 2mw per hour of electricity to Tenaga Nasional Bhd for 16 years, starting in January 2018. Although its share price has declined from its all-time high of RM1.49 in July to close at RM1.08 last Thursday, Tex Cycle is still trading at a high trailing price-earnings ratio (PER) of 28.35 times.
Besides Cypark, AWC and Tex Cycle, are there any alternatives for investors wishing to gain exposure to this sector?
Based on trailing PER and trailing dividend yields (see table), Analabs and Brite-Tech — both involved in providing industrial waste management solutions — appear relatively attractive and have strong balance sheets.
Since cash-rich Analabs ventured into the manufacturing of resin-impregnated papers in 2010, the paper segment has grown to account for two-thirds of its revenue. As the company has invested in its building materials business in the last five years, net profit was impacted by higher non-cash depreciation charges.
While revenue from its recycling business has been relatively stable, Analabs plans to invest in its waste management operation over the next two years. Moving forward, it plans to restructure its loss-making pipe laying and rehabilitation works business in Singapore. Note that the company is sitting on net cash of RM41.3 million (including available-for-sale financial assets), which is equivalent to one-third of its market value.
Meanwhile, Brite-Tech Bhd, which provides integrated water purification and wastewater treatment solutions for various industries, has registered a steady 10% compound annual growth rate in revenue in the past five years. Excluding income derived from investments that distorted its earnings figures, pre-tax profit rebounded 34.7% to RM6 million in 2015, in line with its top-line growth.
The company has raised its dividends every couple of years since 2005, from 0.2 sen per share to 0.63 sen last year. With its share price up 28% this year, its yield has been compressed to 4% from 5% at the start of the year. Brite-Tech bought RM14.2 million worth of investment properties last year and is constructing a warehouse in Nilai Industrial Park.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.