SINGAPORE (Sept 3): Waste disposal company 800 Super is expected to turn free cash flow positive only in FY20, according to research house Phillip Capital.

In recent reports, Phillip had been stating its expectation of near-term PATMI weakness due to transitional ramp-up of new projects.

Last Wednesday, shares in 800 Super slumped 26.1% to 61 cents. This is its lowest in the year to date, down from a high of $1.24 touched in mid-January. The slump followed its announcement of a loss in 4Q18 on the back of higher expenses.

“The loss ... 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,” says Phillip analyst Richard Leow in a Monday report.

Although Phillip expects 19% y-o-y higher revenue and 55% y-o-y higher PATMI in FY19 due to contributions from the sludge treatment facility and the Pasir Ris–Bedok Public Waste Collection (PWC) contract, debt is expected to be higher due to capex on vehicles and bins to fulfil the contract.

In addition, manpower cost and disposal charge will also increase y-o-y in FY19 due to the two large projects, says Phillip, in line with higher throughput at the sludge treatment facility.

Leow thinks that FY20 is a better representation of a normalised full year as FY19 is “transitional” for 800 Super.

“We estimate 8.18 cents EPS and 7.84 cents free cash flow per share in FY20. The current price of 64 cents share price is 8.2 times of FY20 free cash flow per share and gives a 3.1% dividend yield based on our FY20 assumption of 2 cents per share,” says Leow.

As it is, new sludge treatment facility is already treating sludge and expected to be fully operational by December. Recall that the contract awarded by the Public Utilities Board was valued at $133.65 million for a period of 15.5 years. This implies an average annual additional revenue of $8.6 million going forward.

In addition, the Pasir Ris–Bedok PWC contract has commenced and will start contribution in 1Q19.

Awarded by the National Environmental Agency, the contract is worth $193.5 million for a tenure of seven years and four months. This works out to an average annual additional revenue of $26.4 million going forward.

The Pasir Ris–Bedok sector is an amalgamation of the former Pasir Ris–Tampines and Bedok sectors. 800 Super had already taken over the Pasir Ris–Tampines sector since July, and will be taking over the Bedok sector in November.

According to Leow, the commencement of the Pasir Ris–Bedok PWC contract puts 800 Super in a dominant position to bid more competitively for future contracts compared to the former incumbents Veolia (Pasir Ris–Tampines) and SembWaste (Bedok).

“This is a potential source of positive earnings surprise in subsequent periods,” says Leow.

“Upgrade to ‘buy’ from ‘accumulate’; new target price of $1.03 (previously $1.30) Our target price gives an implied FY19 forward P/E multiple of 13.0 times,” he adds.

As at 12.50am, shares in 800 Super are up 4.5 cents to 68 cents.

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