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