Colex Holdings Limited (SGX: 567) is one of the waste management and contract cleaning companies in Singapore. Year-to-date, the company’s share price has fallen more than 15% as compared to the Straits Times Index’s (SGX: ^STI) move in the opposite direction.
Therefore, is Colex a bargain stock currently? To answer that question, we can turn our attention to the six-point acquisition criteria formulated by Warren Buffett. Potential investors can also use the criteria as a starting point to research on the company.
Before we dive into the thick of things, here’s a quick background on Colex Holdings.
One of its two wholly-owned subsidiaries, Colex Environmental Pte Ltd, has over 40 years of experience in the local waste management scene. It is a licenced Public Waste Collector appointed by Singapore’s National Environment Agency (NEA) and it manages the Jurong sector.
Meanwhile, Integrated Property Management Pte Ltd, which is a part of Colex Holdings’ cleaning division, provides customised cleaning solutions for commercial and residential buildings.
Now that we know what the company does, let’s find out if Colex is a hidden gem.
1. Pre-tax earnings of at least US$75 million
For the full year ended 31 December 2016 (FY2016), Colex had pre-tax earnings of S$7.3 million.
Although the figure is much than US$75 million spelt out by Buffett, retail investors looking into Singapore-listed companies should not be too strict about this rule as this might inadvertently sieve out many quality companies.
2. Demonstrated consistent earning power
Source: Colex Holdings Limited Annual Report 2016
Colex’s earnings have increased consistently from S$1.97 million in FY2012 to S$6.38 million in FY2016. This translates to a compounded annual growth rate of 34.1%.
3. Good returns on equity (ROE) while employing little or no debt
Source: Colex Holdings Limited Annual Report 2016; author’s calculations
The ROE figure reveals how efficient the management is in turning every dollar of shareholders’ money into profits.
ROE has been consistently increasing over the years, except the dip in FY2016. Despite the decrease, growing ROE by around eight percentage points from FY2012 to FY2016 is no mean feat.
In FY2016, the firm had a cash balance of S$1.9 million with no debt.
4. Management in place
As of 14 March 2017, Bonvests Holdings Ltd (SGX: B28) had a 78.94% stake in Colex. Bonvests’ main business is in owning and managing various prime commercial and hotel properties in Singapore, Australia and a few other countries.
Henry Ngo has been the Chairman of Colex since 1983. He is also the Chairman and Managing Director of Bonvests.
Together with the consistently high ROE and the experience of Henry Ngo, Colex should be in good hands.
5. Simple business
Waste management and cleaning businesses are incredibly simple to understand.
Colex Environmental provides waste management and recycling services to the industrial and commercial segments, and disposal and recycling of public waste licensed by NEA. Its cleaning business provides contract cleaning of commercial, industrial and residential buildings.
6. An offering price
Colex is going at S$0.395 per share, as of the time of writing. This translates to a trailing price-to-earnings (P/E) ratio of close to 10.
Colex could potentially be a bargain stock with the Singapore market, as represented by the Straits Times Index (SGX: ^STI), going at around 11 times its trailing earnings. However, when compared to its average P/E ratio of 7 from the past five financial years, it does not look cheap.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned