Ecowise

Time to read more about Ecowise. Was quite disappointed with their investor relations since their website only provided 2 years worth of financial statements (which is the same for sgx announcement website) and one of the statements is actually truncated off. Looks like I have to rely on bits and pieces of information.

Let’s take a look at a few figures first. FY04 and FY05 have net losses. We’ll just see the latest three years to take note of the trend in the metrics.

-----------------------------------FY05-----------FY06-----------FY07
COGS (% to revenue)-------65.7%----------46.7%----------43.9%
Gross margin------------------34.3%----------53.3%----------56.1%
Net margin-------------------(-11.2%)---------18.9%----------22.5%
Financial leverage-------------1.7----------------1.6-------------1.7
Asset turnover-----------------0.7----------------1.0-------------1.0
ROE---------------------------(-13.4%)---------31.3%----------35.9%

I saw a brief summary of their results in FY04 and FY05, both are losing money. Without any annual report, I’ve no idea why they are losing money. But let’s focus on the FY06 and FY07 where I have more information.



Here’s what I think:

1. Cost to goods sold has dropped tremendously from 65.7% to 43.9%. The management sited lower disposal cost contributed to this lower cost, thereby increasing their gross margins from 34.3% in FY05 to 56.1% in FY07. I wasn’t really satisfied with this kind of gloss over statement, but there’s not much I can do to find out more, given the sparse information from their website. Still, gross margin this high is pretty admirable. I wonder if there’s anything to compare with.

2. I realized that they had lots of ‘corporate activities’ like cash dividends, right shares and warrant issues. Really messed up the total number of shares outstanding, to the extent that I had problem deciding how many shares they had in a financial year. Looks like they needed lots of capital for something…I don’t know what. My guess is for their investment in a new crusher or their cogeneration plant…but I really don’t know since I can no longer find documents from sgx announcements website.

One interesting thing is that Ecowise had an acquisition on a company named Watertech Pte Ltd, which the founder later bought back (after citing disagreement for common ground and performance indicators). Ecowise made a net gain of $80,000. How come the discussion isn’t made properly before acquisition? So eager to get the company that there is not time to discuss? It’s fortunately that the founder of Watertech wishes to buy back at a higher price. Funny.

3. ROE increase seems to be driven by net margins improvements. At 22.5% in FY07, I think it’s a pretty good business. History is too short for me to comment much too.

4. Based on their financial leverage metric, it seems that Ecowise’s debt is rather stable. I calculated their Debts to Free cash flow for FY06 and FY07, it turns out to be 1.68 and 1.71 respectively. I hope their cashflow is enough to pay for their debts. Actually, the bulk of their FY07’s current liabilities is due to their trade and other payables (75.2% of total current liabilities), while the bulk of their long term liabilities comes from finance lease (78.2%). I don’t think there’s a problem paying off their liabilities at all, looking at their balance sheet.

5. Their revenue can be segmented into different business area, namely collection, processing, solutions and corporate. Let’s take a look:

** margin is based on profit before income tax as a ratio to revenues **

-----------------------collection------processing-------solutions-------corporate
Margins (FY06)-------13.4%-----------14.6%----------13.6%-----------198%
Margins (FY07)------10.8%------------16.9%----------974%------------71.5%

** Due to eliminations, I can’t find the % of each business segment’s contribution to the total revenue **



If I’m not wrong, there are 3 new streams of revenue. I’m not sure if these are to be subsumed under the above 4 business areas. There is absolutely no mention of any plans by ecowise in their financial statements nor their website. I had to piece the information below myself, so I might be wrong.

a) Carbon credit sale – their wholly owned subsidiary signs ERPA with Kansai Electric Power Co Inc in Japan, for the sale of up to 95,000 certified emission reduction certificates, equivalent to 95,000 tonnes of carbon dioxide emitted into the atmosphere which would have been emitted otherwise. The ERPA will be for carbon credits generated from early 2008 until end of 2012.

Since ecowise is the first registered company to do such sale, I think it shows their expertise in this area. I admit, half the time, I’m not sure what they are talking about. I only know that Ecowise plans to leverage their expertise as a Clean development mechanism (CDM) project developer, whatever that means.

b) Their new cogeneration plant that can generate electricity and heat from renewable biomass like wood and horticulture waste. This new plant, if I’m not wrong, can be a new revenue stream as their can sell either the technology or the electricity generated. Okay, I’m not really sure, and I can’t find any information on it. But one thing for sure is that ecowise is using their own generated steam (for heating) and electricity for its production and process, hence reducing the use of diesel and grid electricity, hence their cost should go down even more.

c) Ecowise forms a JV with Holcim, one of the world’s leading cement and aggregates suppliers, to purpose of which is to maintain and operate an industrial materials recycling and processing plant to recycle and process used copper slag in Singapore. Joint research and development facility set up will also seek new alternative sources of fuels and raw materials towards sustainable developments in construction and building materials. I got to admit, this is their most exciting venture as the prospects could potentially be good. It is stated explicitly by the management that this is JV will be the cornerstone of their continued growth in the coming years. They are working together to create an eco-concrete for construction companies, amidst the high construction activity in Singapore. Processed copper slag can be mixed into ready-mix concrete as an alternative to sand. Sounds exciting.

Though I can’t find the exact contribution to the total revenue based on the 4 business segments, I can approximate it. It’s takes up a huge chunk of the total revenue for sure, with solutions and corporate forming a very small percentage. I’m wondering why in page 9 of their FY07 report that the eliminations is so high. Contract got cancelled? What happened? Even in FY06 too. No mentions ofthe high eliminations in both FY06 and FY07 by management. This is a red flag to me.



A few important questions:

1) Ecowise’s core business of collection of used copper slags and general waste for shipyards and fabrication yards in Singapore. It is stated that the collection fees are charged based on per trip basis or tonnage. Where do those ships come from? Will the ships be affected by a highly possible decline in demands over at US?

2) For their processing business, it is the recycling of used copper slag used for surface treatment by shipyards and fabrication yards. So again, will the possible decline in demands from US affect the shipyards/fabrication plant business, and in turn affect Ecowise’s revenue?

3) Is Singapore ready for the green evolution? Could this be a concept stock that won’t take off because others are not ready?



Just found out a bit more in addition to the above when I did a google search on Ecowise. Managed to dig out a summary of the IPO prospectus (from wall straits - wonderful site!) for Ecowise when it got listed in 2002. Here are the extra stuff I managed to dig out:

1. Directors have a profit sharing programe based on the profit before tax (PBT) per year.

PBT over $2.5m up to $3.5m:

* Sunny Ong Keng Hua: 5%
* Lee Thiam Seng: 3%
* Oh Kian Chye: 2%

PBT over $3.5m:

* Sunny Ong Keng Hua: 7.5%
* Lee Thiam Seng: 4.5%
* Oh Kian Chye: 3%

If it reaches $4m in a given year, total compensation for the three directors will be about $600,000. I think this will really motivate the directors to think in line with the shareholders as they have a direct stake in the company. I'm just wondering why their investor relations in their website is so bad as it reflects badly on the company for not wanting to disclose more to prospective investors like me.

2. Stated in their IPO prospectus is their business Model :

Future Plans Include:

* Expand its processing and recycling facilities (okay, done)
* Intensify its marketing efforts to promote the recycled products generated from waste management solutions (since their processed copper slag is doing well, i suppose they did that)
* Feasibility study to produce charcoal on a large scale (not that I know of)
* Licensing of waste management solutions (yes, it's part of their business, a small part)

Business Strategies:

* To provide waste management solutions
* To keep abreast of current recycling technologies and environmental practices
* To expand customer base
* To attract, train and retain experienced professionals
* To achieve growth through acquisitions, joint ventures, or strategic alliances

3. The following are the major competitors they cited:

* JPL Industries Pte Ltd (collection & recycling of used copper slag)
* Meng Guan Landscape & Construction Pte Ltd (recycling horticultural waste)
* Kiat Lee Landscape and Building Pte Ltd (recycling horticultural waste)
* Gold Green Corp Pte Ltd (recycling horticultural waste)

I doubt they are listed, though it means nothing except that it's harder for investors to gauge how strong their competitors are without access to their statements. I wonder what's ecowise competitive advantage over their competitors besides visibility due to their listed status.

4. Risk Factors :

* Operate in a competitive environment and if it is unable to compete favorably, results of operations will suffer
* Subject to regulatory conditions and license renewal
* Dependent on certain major customers
* Dependent on the local ship repair and marine industry
* Decline in the price and demand for recycled copper slag may erode revenue
* Increase in disposal fees charged by NEA
* Dependence on network of service providers
* Loss of key personnel will have an adverse impact on business
* May require additional funding for future growth
* No assurance that future plans will be commercially successful
* Exposed to credit risk and defaults in payment
* Dependence on the Singapore economy
* May not always have adequate insurance coverage
* Contractual obligations to provide clearance and disposal services at fixed rates under the term contracts could result in operating losses
* Failure to comply with the conditions in term contracts
* May be subject to fluctuations in foreign exchange rate which could lead to forex losses
* Subject to intellectual property risks
* Risks relating to the new shares

I think it's good to know the risk factors involved in the business to construct a convincing bear case. As I pointed out, there is a real dependence on the local shipping/marine industry for their core business of processing copper slag. A lot of external factors will determine the outlook for ecowise. Basically it's a concept company and hence risky business.

5. The following are their major customers, at least for the FY2002:

Keppel Group: 12.1% of FY2002 revenue
SembCorp Group: 44.0%
ST Marine Ltd: 12.0%
Toh Kim Bock CE Contractor Pte Ltd: 7.4%

Closely linked to the local shipping/marine industry, as they pointed out in their risk section. It might have changed a lot presently, but back in FY002, the local shipping/marine customers makes up like 75% of their revenue. That's quite unacceptable to me, knowing that shipping is cyclical. I do hope that presently in FY07/08, their revenue income is more diversified.



Summary:

A severely lacking Investor relations in Ecowise’s website AND the sparse information given by the management in the statements PLUS the lack of a clear plan makes this little company a hard nut to crack.

Based on funny empirical formula again, I found out that the value of Ecowise is at 0.225. There is no way to valuate this company properly given the lack of information. I can be sure that the price will definitely go above the current closing price of 0.180 though. How undervalued this is, I’m not too sure. Given that my estimation of 0.225 is correct, 0.180 represents a 20% margin of safety, certainly not good enough for me. Call me greedy, I’ll like it more if I see 0.115 (representing a margin of 50%).