• Awarded $S$1.93mn PWC contract for Pasir Ris-Bedok Sector with the lowest bid
• Gained market share by dislodging incumbents
• Downgrade to Accumulate due to 6.4% favourable price movement since our last report, and lower target price of $1.40

What is the news?

The National Environmental Agency awarded 800 Super Waste Management Pte Ltd, a wholly-owned subsidiary of 800 Super Holdings Ltd (“800 Super”), the contract to provide public waste collection (PWC) services in the consolidated Pasir Ris-Bedok Sector. The contract value is $193.5mn and is effective from 1 July 2018 to 31 October 2025, for a tenure of seven years and four months.

How do we view this?

+ POSITIVES

• Gained market share by dislodging incumbents. 800 Super already operates in the Ang Mo Kio-Toa Payoh (AMK-TPY) Sector, and will add the newly consolidated Pasir Ris-Bedok (PR-B) Sector into its stable. 800 Super has dislodged the respective incumbents of Veolia ES (Pasir Ris-Tampines Sector) and SembWaste (Bedok Sector).
• A boost to revenue and earnings from FY19e onwards. As the PR-B contract commences on 1 July 2018, a full year of revenue will be recognised in FY19e. We estimate $22.9mn incremental revenue in FY19e from the contract and $26.9mn annually thereafter. The difference in annual revenue is due to the progressive transition of the existing Pasir Ris-Tampines and Bedok contracts after June 2018 and October 2018, respectively. We have revised our FY19e revenue and PATMI estimates upwards by 14.1% and 5.9%, respectively.
• Ability to pay higher dividends further out in the future. We think it is likely for expenses to be higher during the ramp-up phase due to the learning curve on operational issues in the new sector. After stabilisation, we believe earnings and cash flows to be improved and we think that higher dividends is likely.

– NEGATIVES

• Tendered the lowest bid, likely trading-off margins. The ongoing AMK-TPY contract was awarded at $160.6mn for a tenure of seven years and nine months. This new PR-B contract is worth only 20% more, despite being for a comparable tenure and yet approximately double the number of households. (See overleaf.)
• Expect higher interest expense and negative free cash flow in FY18e, due to start-up capex. We assume $30mn capex for vehicles, bins and containers. We also assume the capex to be funded by a 20/80 mix of equity/debt. Also expect higher depreciation expense going forward due to higher PPE.

Outlook

The outlook is positive. Some weakness in the near-term is to be expected as recent initiatives (waste to energy plant, sludge treatment facility and public waste collection contract) normalise or ramp-up utilisation, but earnings and cash flow is expected to be higher after the respective learning curves have been overcome.

Downgrade to Accumulate (from Buy); lower target price of $1.40 (previously $1.43)

Our rating downgrade is due to the combined effect of the 6.4% favourable price movement since our last report, and the new lower target price. We have revised our estimates to include the PR-B contract. Our target price is lower than previous due to our change of assumption that the ongoing AMK-TPY contract is not renewed when it concludes in September 2021. Our target price gives an implied FY18e forward P/E multiple of 16.3 times.

Public Waste Collection in Singapore consolidates from nine to six sectors

Figure 1: Pre-consolidation original nine sectors

Figure 2: Present-day seven sectors

Figure 3: Post-consolidation six sectors

Source: NEA

Pasir Ris-Tampines Sector is materially larger than Ang Mo Kio-Toa Payoh Sector

Data from the Census of Population 2010 is likely to be outdated, in view of recent residential developments. Nonetheless, it suggests that the Pasir Ris-Bedok sector is twice as large as the Ang Mo Kio-Toa Payoh sector, in terms of number of households.