Sunday, 5 September 2021

Battle of the Cleaners (Hkex 1397 vs 1955)

Recently have been looking at a couple of small caps. 2 Small caps that I have glanced through would be Johnson Holdings (Hkex: 1955) and Baguio Green (Hkex: 1397).

(Jonhnson Holdings on the left and Baguio Green on the right)

Both companies operate in the same industry in Hong Kong, the cleaning and waste management industry. The main customers of the industry would be the government and customers with large facilities such as power stations and offices.

(Just in case you do not know what cleaners i am talking about)


Why the sudden interest? They just appeared on screeners hence took a glance at it.

Ratios Comparison

Year

2018

2019

2020

Company

Baguio Green

Johnson Holdings

Baguio Green

Johnson Holdings

Baguio Green

Johnson Holdings

Revenue

1429.5 m

1433.3m

1397.5 m

1784.9 m

1131.8 m

2767.4 m

Gross Profit

92.9 m

103.5m

70.5 m

121.1 m

63.5 m

283.8 m

Gross Profit Margin

6.49%

7.2%

5.0%

6.7%

5.6%

10.2%

Net Profit

16.4 m

21.8 m

-11.0 m

28.4m

51.4 m

188.5m

Net Profit Margin

1.1%

1.5%

-0.7%

1.5%

4.5%

6.8%

Liability to Asset Percentage

63.9%

64.6%

66.6%

56.2%

52.1%

49.1%

Return on Equity

6.5%

13.5%

-4.7%

9.47%

17.7%

38.5%

Return on Asset

2.35%

4.78%

-1.5%

4.15%

8.5%

19.6%


From a Financials Comparison, Johnson Holdings seem to have been able to increase their scale via their increase in revenue and maintain profitability compared to Baguio Green.

In 2020, both companies received employment support scheme which resulted in a much better result.

Baguio Green received 80 million while Johnson Holdings received 51.5 million. I find this surprising as Baguio Green has only 5255 employees and spends 890m on staff cost while Johnson Holdings has 13000 employees and spends 2252.3 million on staff cost.

On average, Johnson Holdings spends much on employee salary per staff, and the staff per revenue is lesser than Baguio Green. However, the gross profit margin of Johnson Holdings is much better.

Without the employment support scheme, profit before tax for Johnson Holdings will have improved by 2.6 times while for Baguio Green the losses will have deepen by 9.1 times

As such, Johnson Holdings would be a better company as it has showed the ability to improve its revenue over the past years and deliver a better gross profit. According to the group, this improvement in gross profit margin from 2019 to 2020 is due to successful cost control and changing its tendering approach to focus on more profitable contracts.

Whereas for Baguio Green, it has improved its gross margins as well and has attributed it to decrement in cost of services which was relatively higher than that in revenue especially to the cleaning segment.

As such, Johnson Holdings is currently trading at an adjusted PE of 6 while Baguio Green is trading at an adjusted PE of negative.

Number of Employees

Another way to assess the company's business scale will be the amount of employees. As it is a labour intensive industry, it can be assumed that the more people hired, the more projects will be undertaken. 

Company

Baguio Green

Johnson Holdings

Staff Count FY 2018

8715

8000

Staff Count FY 2019

7457

10000

Staff Count FY 2020

5255

13000

It can be seen that this staff count has been in line with an expanding revenue at Johnson while a falling revenue trend at Baguio.

As such, Johnson Holdings can be seen as the company with more potential for growth.

Key Risk (Johnson Holdings)

1) Ability to continue maintaining its margins.

2) Lack of disclosure of orderbook.  While disclosure is provided for transaction price allocated to remaining performance obligation for contracts with customers, expected orderbook to be fulfilled in the year ahead is not provided.

3) Breach of Occpuational Safety and Health Ordinance. Similar to construction industry, safety of workers is at the utmost importance and this can be seen in its competitor which is banned from tendering for 5 years due to a safety breach resulting in injury of employee.

(Losing of tender to another company, hey look its Johnson Holdings getting it)


This in particular can be a concern to Johnson Holdings as it has on-going litigations.



Baguio Green Opportunities

All is not doomed for Baguio Green as well, they have some positive rental reversions themselves.

(Reversions of 11 and 9 mil to 18 and 12 mil)

Their revenue in 1H 2021 is flat compared to 1H 2020.

Their numbers of employees have grown to 6084 as of June 2021 from 5255 at end 2020. 

Along with an expected orderbook of 620 million contract to fufill for the rest of this year, it is estimated that the revenue for this year will be higher than 2020 by around 10%

Lastly, with the passing of the waste charging bill on 26 August 2021 by the Hong Kong Government, a bill that has been debated for years and dragged on for a period of times. This gives Baguio Green some hope as it has been a player in the recycling industry for a while.

(Ready for the MSW Charging Bill Changes)


Conclusion

To conclude, Johnson Holdings is the better company but it comes with many inherent risk.

What is interesting is that in May 2021, both companies were awarded the same project, but Johnson Holdings had a way higher tender price that was accepted.


1 would probably ask if its even possible that the revenue has increased so much. Well interestingly I believed it was a joke as well and after looking up, I realize it is possible.

 

(Same contract but it has increased by around 50% in value)

(Another example of an increase in contract value, 63m in 2017, 118m in 2019, 284m in 2021)

However, as there has not been as much government tender renewals in 2021 due to a huge amount being awarded in 2020 already, the company’s new order book victory will rely on the semi government and private sectors.

Most government renewals would happen at 2H 2022 and in 2023.

Ultimately, the ability to control gross margins would be of the utmost importance as labor cost will only increase.

Is Johnson Holdings a company to add into one's portfolio? Well, it depends on whether one is ok with the risk involved.

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