Chong Ser Jing | May 11, 2017 5TG D05

800 Super Holdings is an environmental services provider.

Headquarters Singapore
The company provides waste management services,
cleaning and conservancy services, and horticultural Website 800super.com.sg
services. It currently operates mainly in Singapore.
Environmental and
Industry
facilities services
Why Buy:
Low (5-year beta:
Volatility
Good long-term track record of growth -0.03)

Presence of pricing power in its business Market Cap S$225.3

High potential for growth in profit margins in the Cash/Debt S$19.25 / S$49.83

future
Revenue (TTM) S$159.0

Earnings (TTM) S$19.9

Total Inside
72.02%
Ownership

Recent Price S$1.25

Yield 2.8%

TTM = Trailing 12 Months

Dollar amounts in millions except recent price.

Data as of 11 May 2017

Note: On how to make the best use of Stock Advisor Singapore’s recommendations, you can check out here.

This month’s Singapore recommendation, which is 800 Super Holdings (SGX: 5TG), is a thinly-traded stock.

The past six months has seen an average of just 106,341 shares change hands daily. As such, we strongly advise that
members use limit orders when buying shares. If everyone piles in together, then nobody wins (except sellers!).

We recommend setting a price for the limit order that is not more than 2% above the last traded price.

Please remember, at the Motley Fool Singapore, we’re long-term investors. So, there’s no need to rush. With all this out of
the way, let’s start rummaging in the bin with 800 Super.

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11/13/2017 The Motley Fool Stock Advisor » Buy 800 Super Holdings (SGX:5TG)

A “Rubbish” Company

Established over 30 years ago in 1986, 800 Super is in the business of providing environmental services. More specifically,
800 Super provides waste management services (such as public waste collection and recycling services), cleaning and
conservancy services, and horticultural services. If horticultural services sound a little alien to you, it refers to services
such as grass-cutting and the pruning and planting of trees.

The company does not share how much revenue its different businesses generate. It also does not provide a geographical
breakdown of its revenue streams, as far as we know. But in its annual report for FY2016 (fiscal year ended 30 June 2016),
800 Super said that most of its revenues were generated in Singapore.

800 Super’s business involves multi-year contracts, which gives its business some stability and recurring revenues. This is
a trait we like to see. We can’t determine how much of its current revenue comes from long-term contracts, but we
estimate that over 40% of it in FY2016 came from three large, long-term contracts awarded by the National Environment
Agency. These contracts are:

(a) A S$160.6 million contract won in August 2013 for the company to provide waste-collection services for the
residential and trade premises in the Ang Mo Kio–Toa Payoh sector; this contract commenced in 1 January 2014 and
has a term of seven years and nine months.

(b) A S$97.3 million contract won in February 2014 for the company to provide integrated public cleaning services
in the North-West region of Singapore; this contract runs from 1 April 2014 to 30 March 2020, with an option to
extend for one year.

(c) A S$204.9 million contract won in July 2014 for the company to provide integrated public cleaning services in
the South-West region of Singapore; this contract runs from 1 September 2014 to 31 August 2021 and also has a one-
year extension option.

We estimate that these contracts collectively generated around S$66 million in revenue per year for 800 Super – S$66
million works out to be 42% of the company’s total revenue of S$156.4 million in FY2016.

Sweeping Up All That Growth

800 Super was listed in July 2011, so its financial track record goes back only to FY2008. That’s not a very long period to
study, but we like what we see.

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11/13/2017 The Motley Fool Stock Advisor » Buy 800 Super Holdings (SGX:5TG)

Source: 800 Super IPO prospectus and annual reports

The company’s revenue has not only grown consistently for the period under study, but it has increased at a respectable
compound annual rate of 13.9%. 800 Super’s profit growth may be a little choppier than its revenue-growth, but there’s
still an unmistakable upward trend. From FY2008 to FY2016, 800 Super’s profit has also grown at an impressive
compound rate of 29.2% per year.

800 Super’s cash flow picture is messier than both its top-line and bottom-line. But the company has still managed to
generate positive operating cash flows in each year for the period we’re studying. That’s a likeable trait.

There are some warts, though. 800 Super’s balance sheet has carried more debt than cash for most of the years. But all
things considered, we do think the company’s financial track record looks good.

800 Super’s most recent revenue growth has slowed down. For the six months ended 31 December 2016, the
environmental services provider grew its revenue by just 3.4%. But due to lower expenses, its profit attributable to
shareholders managed to increase at a much stronger rate of 64.8% to S$8.15 million.

Picking Up More Growth Ahead

We think there may be better days ahead for 800 Super for two reasons.

Firstly, 800 Super has historically been adept at winning new projects as well as negotiating better terms when existing
projects are re-awarded. Since its listing, 800 Super has made 12 earnings announcements and it has attributed its revenue
growth in each of the earnings announcements to either the award of new contracts or a combination of the award of new
contracts and revised pricing from re-awarded projects. In fact, “revised pricing” was mentioned in nine of the 12 earnings
announcements.
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11/13/2017 The Motley Fool Stock Advisor » Buy 800 Super Holdings (SGX:5TG)

We think that the frequent appearance of “revised pricing” is a sign that 800 Super possesses pricing power in at least
some of its businesses. As an example of the kind of positive re-pricing that 800 Super has achieved, the company first
won the public waste collection contract in the Ang Mo Kio-Toa Payoh sector in September 2005. The contract, which
started in July 2006 and lasted for seven and a half years, was worth ‘just’ S$94.7 million. The current contract has a term
of seven years and nine months and is worth S$160.6 million, as mentioned earlier.

We’re counting on 800 Super’s management to continue winning new projects and achieving favourable pricing terms
when projects are re-awarded. In our view, there’s a high chance that 800 Super can achieve these, given that some of its
markets are highly fragmented. In its 2011 IPO prospectus, the company stated that it was competing with over 1,000
cleaning companies in its cleaning and conservancy services business, and with over 200 companies in its horticultural
services business.

800 Super has managed to expand its market share in the past. In 2009, the company was awarded a five-year, S$31
million contract by the NEA to provide street-cleansing services in the North-East region of Singapore. As we had already
mentioned, 800 Super now provides public cleaning services to two regions, the North-West and South-West. There are
currently seven regions in Singapore.

Given 800 Super’s resources (it has annual revenue of over S$156 million) and long track record, we believe the company
can steadily win shares in at least some of its markets in the future.

Secondly, we see a clear path for 800 Super to improve its profit margins and, hence, its bottom-line. Historically, 800
Super has proven adept at keeping its costs in check – we see this from how its net profit margin (profit attributable to
shareholders divided by revenue) has stepped up from 6.7% in FY2012 to 7.8% in FY2014, and then to 10.3% in the first
half of FY2017.

In the company’s latest earnings report for the quarter ended 31 December 2016, it stated that its new waste-to-energy
(WTE) plant located in Tuas “remains on track for completion in the second quarter of 2017.” The plant “will supply green
electrical energy to the depot and the to-be-completed material recovery/sludge treatment facility, generating new revenue
streams and cost savings to [800 Super].”

As a provider of waste collection services, 800 Super has to dispose of the waste it collects at a landfill or a waste-to-
energy plant – both options require 800 Super to pay fees to the operator of the facilities. According to the NEA, the
landfill site and waste-to-energy plants in Singapore typically charge S$77 to S$81 per tonne of waste. 800 Super’s
investor relations told us that the company handles less than 500,000 tonnes of waste per year. The new WTE plant can
process up to 65,000 tonnes of waste annually. It’s hard to be precise just how much cost-savings can come from the new
WTE plant, but suffice to say, there should be some cost-savings that the company can enjoy.

Management and Culture

800 Super’s top two leaders are brothers, Lee Koh Yong and Lee Cheng Chye. The former is the executive chairman while
the latter wears the CEO-robes. Both have extensive experience with the company – Lee Koh Yong is one of 800 Super’s
co-founders, while Lee Cheng Chye has been with the company since 1993.

Collectively, the two brothers control 72.02% of 800 Super’s stock as of 15 September 2016. This gives 800 Super’s
managers a lot of skin in the game, which theoretically should align their interests with minority shareholders. But,
that level of control also opens the door for potential abuse of minority shareholders.

Fortunately, we don’t see any strong evidence of minority-shareholder abuse. For instance, related-party transactions at
800 Super have been just S$34,000 in each of its last few fiscal years.
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11/13/2017 The Motley Fool Stock Advisor » Buy 800 Super Holdings (SGX:5TG)

But, we note that the two Lee brothers are highly remunerated compared to the company’s profit. In FY2016, the
remuneration for Lee Koh Yong and Lee Cheng Chye was between S$1.25 million and S$1.5 million each. For some
perspective, S$1.25 million is 7.5% of 800 Super’s profit attributable to shareholders for the year. The total remuneration
of Piyush Gupta, CEO of Singapore’s largest bank DBS Group Holdings (SGX: D05), was S$8.44 million in 2016 –
that’s just 0.2% of the bank’s profit attributable to shareholders of S$4.24 billion earned during the year.

We are a little uncomfortable with the remuneration levels of 800 Super’s two leaders. But, we don’t think this is a deal-
breaker. We will be watching developments on this front, though.

Valuation

At the current share price, 800 Super is valued at 11.2 times trailing earnings. This PE ratio is near a five-year high, as you
can see in the chart. But, given the company’s solid earnings growth in the past, coupled with its growth potential, we
think this is not excessive.

Source: S&P Global Market Intelligence

Right now, the company also has a trailing dividend yield of 2.8%. This is a low yield. But, we note that the company has
either grown or maintained its annual dividend since initiating one in FY2011.

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11/13/2017 The Motley Fool Stock Advisor » Buy 800 Super Holdings (SGX:5TG)

Source: 800 Super annual reports

We think 800 Super’s dividend is well-covered. Its trailing dividend of S$0.035 per share is just 31% of trailing earnings
per share, and 60% of trailing free cash flow per share.

Risks And When We Will Sell

An important risk we see with 800 Super is its weak balance sheet. Based on its latest financials, it has S$19.3 million in
cash but S$49.8 million in total debt. This works out to a net-debt of S$30.6 million. We don’t like to see our
recommended companies in Stock Advisor Singapore carry too much debt, as it exposes us to financial risk. But, we do
note a few mitigating factors in 800 Super’s favour:

(a) In the first half of FY2017, the company’s interest coverage ratio (profit before interest expenses and taxes
divided by interest expenses) was a high 21. Its operating cash flow was also 16 times its interest expenses for the
same period.

(b) The company has long-term contracts that give it revenue-stability, as mentioned earlier.

Another crucial risk concerns the new WTE plant. 800 Super has no experience, thus far, running such a facility. If there
are significant problems with the plant when it starts operations, it could damage the company’s finances. Given 800
Super’s net-debt position, its margin for error with the WTE plant is lower than if it had a balance sheet with minimal or
no debt. But, the chances of hiccups look low to us because WTE plants have been around in Singapore for a long time –
the first WTE plant started operations in the late 1970s.

Issues related to foreign labour in Singapore could also eat into 800 Super’s profit margins. The company mentioned in its
IPO prospectus that it is dependent on foreign labour. We don’t think this has changed given the nature of the company’s
business. Depending on the government’s foreign-labour policies, 800 Super could face manpower shortages and/or
employee-cost issues. If such problems emerge and become too onerous – we should be able to gauge this from changes in
800 Super’s employee benefits expense – we will have to consider parting ways with the company.

Decisions made by the NEA can also have an impact on 800 Super. The NEA had previously reduced the number of public
waste collection sectors in Singapore from nine to six (there are actually seven sectors now, but the Bedok and Pasir Ris-
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Tampines sectors will be merged into one in 2018). Any further consolidation could affect 800 Super’s business.
11/13/2017 The Motley Fool Stock Advisor » Buy 800 Super Holdings (SGX:5TG)

The Stock Advisor Singapore Bottom Line

800 Super is a company providing services that are necessities. It has long-term contracts, which gives its business some
stability and recurring revenues. We also see growth opportunities for 800 Super and we think there’s a high chance it can
improve its future profit margins. Although its valuation may be near a five-year high and its balance sheet has
considerably more debt than cash, we think the risks are adequately compensated for by the company’s strengths.

800 Super may be a rubbish collection company, but it’s certainly no rubbish company. Now’s a good time to hitch a ride
with 800 Super.

Disclosure: Chong Ser Jing owns shares in 800 Super. The Motley Fool Singapore does not own shares in any of the
companies mentioned. All information is provided exclusively by The Motley Fool Singapore Pte Ltd, a licensed investment
advisory research provider (MAS Licence No. FA100056-1). Any information, commentary, recommendations or
statements of opinion provided here are for general information purposes only.

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