· Greener and bigger. Recall that we featured Tex Cycle Technology (M) Bhd (TEXCYCL) in early-1Q13. Back then, we were less excited as the Group was running at full capacity with 11 types of scheduled wastes code approved by DOE while its new plant was only aimed to start construction by late-2Q13. However, things have changed since then. We have been recently made aware that the Group has been awarded with 20 additional types of scheduled wastes code and its new plant is finally up-andrunning. These allow TEXCYCL to tailor to the needs of its clientele and to enable the Group to tap into a more diverse range of customers. In fact, we understand that the Group aims to apply more scheduled waste codes under the renewableenergy category and manufacturing sectors for its recycling business. Besides, in view of the capacity constraint in its current plant (P1), the Group has acquired an 8-acre land in Teluk Gong, Klang, back in May 2012 for RM6.7m. In early-2014, the Group has just completed a new plant (P2) with higher storage capacity on the first 3 acres of the land with the balance retained for future plant expansion. We estimate that P1 should be able to handle approximately 13,000 tonnes p.a. of wastes in a 1-acre land. With P2, the Group should be able to increase its production capacity by 54,000 tonnes p.a.. In our forecast, we have assumed a more sustainable and gradual growth in production output and TEXCYCL may fully utilise the additional capacity by end-2018.

· Stronger numbers ahead? The benefit of such strong growth in capacity has stated to reflect in FY14 revenue, which spiked to RM21.2m or 42% from RM14.9m in FY13. However, the strong set of topline growth was eroded by (i) lower other income of RM2.0m (-73% YoY); (ii) higher depreciation expenses of RM2.0m (+79% YoY); and (iii) RM1.7m provisions for legal claims. As a result, net profit declined 60.6% YoY to RM3.4m in FY14 from RM8.5m in FY13. Nonetheless, we believe the lower net profit margin (NPM) of 15.8% could be short-lived in nature as we understand that the Group is able to achieve a sustainable NPM of ~30% given the Group’s ability to generate >60% in gross profit margin (GPM). This expectation is reinforced by the strong 3Q15 set of results. Revenue grew 17.6% YoY to RM18.7m (or RM24.9m on annualised basis). GPM was relatively stable at 61.4% while NPM has normalised to 35.7%. As such, the Group had achieved a 9M15 net profit of RM6.7m (or RM8.9m on an annualised basis), +35.7% YoY. On QoQ basis, however, the Group fell short with -23.8% revenue and -55.1% net profit due to lower recycling volume in 3Q15 against 2Q15. Nonetheless, we foresee 4Q15 to pick up with the expected increase in scheduled maintenances of TEXCYCL’s clients during year end. Going forward, based on our production output expansion of 13,570 tonnes p.a. in the next few years and an average selling price (ASP) of RM1.08/kg, we estimate that TEXCYCL to record revenue of RM35.9m and 50.5m in FY16 and FY17. Coupled with a relatively stable GPM assumption of ~63% and lower taxation (due to pioneer status), the NPM is expected to gradually improve to approximately 36% and 40% for FY16 and FY17, respectively, making the net profit to register at RM13.1m (+47% YoY) and RM20.4m (+56% YoY).

· No minimum dividend policy but… With the exception of FY14’s dividend payout of 0.25 sen a share, TEXCYCL has been consistently paying a 5% dividend (i.e. 0.5 sen a share). We anticipate for the management to continue with a payment of 0.5 sen a share moving forward. While the Group needs to allocate RM13.0m for its capex, we still see no stress in their balance sheet with this dividend payout (<10% for FY15-FY17) as the group is in a net cash position as at end-Sep15 and is likely continue to maintain this leverage position in the next couple of years.

· A stock to buy and hold for long-term? The stock has been trading <10x PER in FY13 when (i) it reported an earnings base of ~RM8-9m and prior to (ii) recent capacity-led run-up as well as (iii) a few one-off items in FY14. Its closer listed peers, Hiap Huat Holdings (HHHCORP) has dipped into red since June 2014. Should we peg out valuation to FBMSC target PER of 12.5x, the stock should be valued at RM0.96 based on FY16E EPS of 7.7 sen. This PER would be closely inline with FY14 PER of 12.0x of Cypark Resources Berhad (CYPARK), a fellow waste management company. Nevertheless, we do not rule out that the stock could trade at a much higher target PER as its above-industry growth of ~50% for the next few years. Should we roll our valuation base year to FY17E, the stock should be valued at RM1.49 with FY17E EPS estimate of 11.9 sen. Not rated for now.

Source: Kenanga Research - 16 Dec 2015