Can investors find gems among waste management players in Singapore?

THE Singapore Exchange (SGX) has seen an influx of waste management companies since August last year, with 3 companies joining the Catalist board.

The companies aren't directly comparable, as each has a slightly different combination of business segments that results in a different financial profile.

But they are similar in that they provide a relatively more inelastic service to industrial customers. They are also mostly small companies, with headroom for growth.

The 3 recent debutants are shipping waste management company Shanaya Group ; LS 2 Holdings , which provides cleaning services for the public and private sector; and Johor-based 5E Resources , which manages hazardous waste for industrial customers and has 3 waste treatment plants.

They join Colex Holdings , which provides contract cleaning services as well as waste disposal services.

Colex's closest peer in the past was 800 Super Holdings. The latter was privatised in 2019 by its controlling shareholder, with financing from investment group KKR. Investors who bought 800 Super at its IPO in July 2011 would have netted a gain of 269.1 per cent.

Will investors find yet another gem among the current crop of waste management players?

Colex's performance has been underwhelming. Since its listing on the Catalist in April 1999, the stock has returned 43.3 per cent. It last traded flat at S$0.20 on Friday (May 13), giving it a market capitalisation of S$26.5 million.

The company posted a net loss of S$684,000 for the year ended Dec 31, 2021, down from a net profit of S$1.8 million a year earlier.

Revenue fell 9.9 per cent to S$42.5 million, after the company’s public waste collection contract for the Jurong sector was completed on Mar 31, 2020. Some existing contracts were also completed, while fewer new contracts were secured within its contract cleaning segment.

Operating profit before tax in the contract cleaning segment fell 26.2 per cent to S$3.5 million, due to falls in revenue and in government grants recognised as well as an increase in depreciation expenses. This was offset partially by a decrease in cost of inventories and consumables, staff costs and other operating expenses.

Also loss making is Shanaya, which listed via a reverse takeover of CPH in August 2021.

Shanaya saw revenue rise by 7 per cent to S$6.4 million for the year ended Dec 31, 2021. But it posted a loss of S$4.7 million, down from a profit of S$774,000 a year earlier, dragged down by one-off expenses.

Barring the financial costs and effects of the reverse takeover, the company said it would have seen a smaller net loss of S$0.4 million. The loss was partly due to an increase in other operating expenses, which rose by 38 per cent or S$1 million.

Direct operating costs rose over the year due to a labour shortage at the Singapore port, which raised labour costs. It also served more cargo ships instead of cruises, which generally pay a higher rate as they produce more waste.

Since its listing, Shanaya has lost 48.2 per cent of its value. It closed flat at S$0.114 on Friday, giving it a market capitalisation of S$12.9 million.

The 2 remaining waste management companies are currently profitable, although their profits have declined.

LS 2 saw revenue decline by 1.5 per cent to S$53.8 million for FY2021, while net profit fell 70.9 per cent to S$2.1 million.

The decline in revenue was attributed to the completion of 2 existing contracts in the private sector, which lapsed in FY2020 and were valued at S$5.3 million.

Net profits were also under greater pressure due to an 8.1 per cent increase in direct operating costs, to S$44.8 million.

Also, grant income from schemes such as the Special Employment Credit, Wage Credit Scheme and Jobs Support Scheme declined in FY2021.

For FY2021, LS 2 had a net profit margin of 4 per cent and an operating margin of 13.2 per cent.

The company last traded at S$0.33, up 26.9 per cent or S$0.07 on Friday, giving it a market capitalisation of S$61.1 million. This is up S$0.13 from its debut price of S$0.20.

LS 2 was hit with a “trade-with-caution” notice on its trading debut after it hit an intraday high of S$1.60. It ended its first day of trading up 340 per cent at S$0.88.

The newest to join the group is 5E Resources, which was listed on the Catalist on May 12.

For the 9 months ended Sep 30, 2021, its revenue grew 25.7 per cent year-on-year to RM37.4 million. But net profit fell 30.5 per cent to RM4.2 million. That gives it a net profit margin of 18.3 per cent and an operating margin of 48.6 per cent.

The company attributed its net profit fall to the high base in FY2019, after the company had received 2 ad-hoc contracts from the government.

The company is raising funds to expand its processing capacity of high organic content waste, to meet the needs of the petrochemicals and rubber industry in Malaysia.

It also aims to serve small quantity waste generators in central peninsula Malaysia with the construction of an off-site storage plant.

Both segments are expected to contribute “significantly” to the company’s topline.

5E resources closed at S$0.26, down S$0.005 or 1.9 per cent on Friday, giving it a market capitalisation of S$38.3 million.