Business Description
Tex Cycle Technology (M) Berhad is primarily engaged in an environmentally friendly Waste Management Business which provides professional services preferred by companies from the various industries, mainly of the Electronics, Engineering, Automobile, Oil & Gas and Printing industries in accordance with Environmental Quality Act.
Their systems and procedures are technologically advanced and upgraded frequently. This allows them to offer one-stop solution for 31 waste codes to valued customers with economical products and services in total compliance.
What is Scheduled Waste?
Substances that are highly flammable, corrosive, toxic and easily react or cause explosion when mixed with other substances. They may exist in a liquid, solid or semi solid form (sludge). There are 77 categories of scheduled waste as established by the Department of Environment Malaysia (Jabatan Alam Sekitar). There are strict laws by the government, requiring companies to manage their waste properly or face hefty fines. Handling of scheduled wastes requires permits issued by Department of Environment (DOE).
Competitive Advantages
Barrier of entry: Obtaining a full range of permits for the management of scheduled waste is challenging, with strict regulation from DOE. The permits by itself are valuable. Building a “material-to-end” value chain is difficult and costly. With recent venture into converting recovered biomass into energy, further enhance the difficulty to replicate such value chain.
Pioneer Status approved by MIDA for Plant 2: 70% tax exemption for 5 years from February 2014. Expected expiry on 2019 (subject to future extension approval process).
Strong Management know-how: The directors have built a strong young management team who are experts in their own fields, in charge of the key aspects of the business (Management, Sales, R&D) to ensure that the company’s directions are unified to continuously bring in increasing profits.
Growth Drivers
The Blue Ocean strategies are formulated such that they move their value chain beyond the current existing customers, to tier-2 and tier-3 customers. Current customers, who send industrial and chemical waste to them for treatment and recycling usually have low receivable turnover. Thus, the Group had been planning to move the value chain up, so as to increase their certainty of cash flow. The Group has planned to venture into the energy recovery market for a better application of the schedule waste. This ensures their timing of cash flow is appropriate and future shareholders could get a better dividend policy.
Business Risks
Increasing Competition (towards recycling space): With good profit margin in the scheduled waste recycling business, newer entrants in the recycling space with sufficient capital will fight for their market shares, creating a price war. With more vendors for the customers to choose from, that would also contribute to downward pricing pressure on the vendors. In some cases, vendors may even resort to “buying” their waste to gain customers and market share, further giving downward pressure on profit margins. Expanding towards other categories of scheduled waste management may signify that the profit growth, as their core business (processing of rags, gloves, wipes) are being pressured by smaller competitors.
Bad trade receivables: Trade receivables are generally slow to retrieve in the waste treatment & recycling industry. This would be worsen by changes in economic dynamics, such as recession. In those instances, the Group would be badly affected if they do not preserve some capitals for their operations.
Subject to commodity cycles: Sourcing of materials & selling their processed raw materials are highly cyclical, subject to the supply & demand of global commodity prices.
Financial Analysis
In FY2009 and FY2011, chemical trading business segment hurt the overall business profitability. In FY2015, the dip in adjusted EBIT and NPAT margin is due to adjustment made by excluding pioneer business income. In FY2016, significant increment in adjusted EBIT and NPAT margin is due to cost saving initiatives by the management and improving profit from the hazardous waste management business.
In FY2011, there was an increase of RM 4.36mil in trade receivables from previous year. In FY2012, operating cash flow improved and there was a RM 6mil drawdown from term loan. In FY2013, free cash flow (FCF) was weighed down by CAPEX spending on old and new plant (testing of new equipment installed). In FY2014, FCF was again weighed down by CAPEX spending on old and new plant (begin operation).
Valuations/Recommendations
The group has conservative management and their performance is merit-based promotion. Their passionate Technical Director possess the technical know-how of scheduled waste treatment and led in-house R&D department. They double their customers every 5 years and continue to grow the pool of customers. Without a doubt, they are one of the market leader in hazardous waste recycling segment with highest no. of license. Going forward, venture into energy recovery plant is a very good growth driver. However, this also mean that they have to bargain/compete with local government for competitive feed-in tariff rate. Nevertheless, such venture could stabilize their cash flow and increase their cash and quality of earnings. With the company still in pioneering stage, we rate as BUY for longer term.
