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Broker's take: PhillipCapital upgrades 800 Super to 'buy'; lowers target price to S$1.03

ANALYSTS at PhillipCapital have upgraded their call on waste management firm 800 Super to "buy", but slashed its target price for the stock from S$1.30 to S$1.03 as the company recently posted a fourth-quarter loss that fell within the brokerage's expectations.

PhillipCapital said in a research note on Monday: "The loss reported in the fourth-quarter is an aberration and the business has not changed structurally. This one quarter of loss is not reflective of future quarters, nor is it a precursor to deterioration of future earnings."

As such, positives include the commencement of operations at its new sludge treatment facility, which is expected to be fully operational by December 2018. The contract for the facility, awarded by the Public Utilities Board, is valued at S$133.65 million for a period of 15.5 years or an average annual additional revenue of S$8.6 million, PhillipCapital said.

Additionally, the firm is expected to make revenue gains from new public waste collection contracts for fiscal 2019. 800 Super has managed waste collection for Pasir Ris–Tampines since July 2018, and will be taking over Bedok in November 2018. The contracts, awarded by the National Environmental Agency, are worth S$193.5 million for a tenure of seven years and four months. This translates to an average annual additional revenue of S$26.4 million, the brokerage said.

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Moreover, the analysts added: "These contracts put the firm in a dominant position to bid more competitively than the former incumbents Veolia (Pasir Ris–Tampines) and SembWaste (Bedok) for the waste removal contracts with condominiums and commercial properties within the sector.

This, they said, might be a potential source for a positive earnings surprise in subsequent periods.

PhillipCapital expects year-on-year revenue growth of 19 per cent in its forecasted fiscal 2019 earnings for 800 Super and 55 per cent increase in profit after tax and minority interests for the said period due to contributions from the sludge treatment facility and the new public waste collection contracts.

"However, debt is expected to be higher due to capex on vehicles and bins to fulfil the PWC contract. Correspondingly, manpower cost and disposal charge will increase year-on-year in forecasted fiscal 2019 earnings due to these two large projects," the analysts said.

PhillipCapital also expects the waste management firm to be cash flow positive only in fiscal 2020.

800 Super shares traded S$0.045 or 7.1 per cent higher at S$0.68 at the end of the morning session.