I started investing in 2015. I was attracted to value investing or rather, it made much more sense to me compared to trading or looking at technical charts. The first investment book that I read was “The Manual of Ideas” by John Mihaljevic.
From there, I developed a set of criteria to look for stocks in SGX. I decided to split my money five ways and invested in the following 5 stocks. Micro Mechanics, ARA Asset Management, ISOteam, Fu Yu and 800 Super. My first multi-bagger turned out to be 800 Super.
The Investment Thesis for 800 Super
800 Super (now delisted) is an environmental services provider. Their services includes waste management, cleaning and conservancy services and horticulture services. Those staying in Ang Mo Kio, Toa Payoh and Bedok would be able to see their garbage trucks roaming around.
In 2014, they were awarded 3 contracts by NEA.
- 7 year 9 month waste collection services in AMK-TPY area.
- 6 year integrated public cleaning contract for North-west region of Singapore
- 7 year integrated public cleaning contract for South-west region of Singapore
These are solid stable revenue generating contracts and at that time, my investment case for 800 Super would be that they will initially be a high growth company which will transform to a dividend yield play as their revenue stabilizes and cashflow increases as they collect taxpayers’ money over the length of the contracts.
To add, this is an industry with high barriers to entry due to the huge investment cost required to purchase the machines and also the track record needed to show NEA that they are able to step up to the multi-year contracts.
The table below is the criteria that I used to evaluate my stocks and how 800 Super measured against it.
|1||Revenue Growth||3 years Rev Growth||Y|
|2||Net Profit Margin||>10%||12.52|
|3||Return on Equity||>15%||35.55|
|4||Debt to Equity||<0.5||0.75|
|6||Cash Flow Ratio||>1||0.58|
As you can see, they did not meet the D/E and Cash flow ratio. However, I opined that they had to take up debt to purchase their machinery fleet to meet the demand of their newly awarded contracts. Furthermore, it is a 7 year contract and they will use the cash flows to pay back the debt.
Where did it go right
In 2015, 800 Super reported 22% increase in revenue and almost 100% increase in profits. During that period, we were facing the Oil and China crisis therefore the stock price did not go up. I took this opportunity to accumulate more.
As the South west IPC contract only started in Sep 2014, the full year contribution will not be reflected until FY2016. When 800 Super reported FY2016 results, revenue indeed increased by 11.5% but net income remained at the same level.
That FY, FCF increased from 1cts per share to 11cts per share. I take this to mean that the company has reduced their capex to serve the contracts and therefore, the excess cash could be used to either return to shareholders or to reinvest in the business.
Come 2017, 800 Super’s results were stable but they increased their dividend payout by 60% from 2.5cts to 4cts per share, giving it a dividend yield of 3%. If you compare to my average price of about 45cts, it’s close to 9%.
Why its time to let go
In 2017 I divested twice. Half when it was at $1 which is about 100% return on my initial investment and another half when share price rocketed to $1.30.
However in 2018, I felt that the fundamentals are deteriorating and their FY18 commentary kind of called the top for me. Hence I divested all of my stock right after the release of FY18 results.
I also compared 800 Super’s 2015 criteria with their 2018 results,
|S/N||Description||Criteria||800 Super FY15||800 Super FY18|
|1||Revenue Growth||3 years Rev Growth||Y||N|
|2||Net Profit Margin||>10%||12.52||9.2|
|3||Return on Equity||>15%||35.55||11.00|
|4||Debt to Equity||<0.5||0.75||1.05|
|6||Cash Flow Ratio||>1||0.58||0.31|
I was lucky to be able to pick a good company right off the bat and it took about 2 years to achieve >100% gains. The rest of the 4 stocks did pretty well and I’ve divested all of them with decent returns (Well, ARA got delisted so no choice… John Lim I’m still waiting for the relisting of ARA).
If there’s anything the Covid-19 pandemic has taught us, it’s to invest in fundamentally good stocks. You see globally, airlines and oil drilling companies are struggling with liquidity issues. I think we might see some retail, F&B and construction companies facing the same problems due to the KNNCCB (Key Nationwide Non-essential Business Comprehensive Circuit Breaker lah.. kudos to Everyday SG https://www.facebook.com/everydaysg/).
I still use the criteria to evaluate but I’ve become more flexible ( could be in a good or bad way..). However, I feel that the 8 criteria is quite useful in showing the fundamental strength of the company. Of course, more due diligence is required (Please do not invest based on these numbers alone) before you invest in a company. For example, you have to adjust the revenue or earnings to exclude one off items/events if not the results will be screwed.
There are some stocks that still tick all or most of the boxes and Union Gas (SGX:1F2) is one of them. You could tweak the values to suit your investment appetite.
|1||Revenue Growth||3 years Rev Growth||Y|
|2||Net Profit Margin||>10%||10.68|
|3||Return on Equity||>15%||29.97|
|4||Debt to Equity||<0.5||0.06|
|6||Cash Flow Ratio||>1||0.53|