STREAM Group Sdn Bhd may not be a household name but it has built a reputation for itself providing systems that do something basic yet vital – waste collection.
The company’s systems are so advanced that they have been used for some time now by governments and property developers in Singapore and the Middle East, where the bulk of its income is derived from.
The homegrown company is in the news because public-listed AWC Bhd
has just gained its shareholders’ approval to buy the remaining 49% in Stream from Premium NXL Sdn Bhd (PNSB) to make it a wholly owned subsidiary.
AWC, a known facilities-management company, had owned 51% of Stream since 2004 and decided to take up the remaining stake from the original founders who are retiring.
At the EGM earlier this week, AWC’s shareholders also agreed to the purchase of a 51% interest in Premium Patents Sdn Bhd from PNSB, and another company, Premium Deluxe Sdn Bhd.
Collectively, AWC will be paying RM110mil cash for the acquisitions.
So what are Stream’s growth prospects and how does AWC ensure that the management team at Stream remains intact following the acquisition?
Speaking with StarBizWeek, AWC chief financial officer Richard Voon explains that Stream has had a well-designed management incentive scheme (MIS) to reward its employees for some time now.
“The current management team was established and groomed by the (exiting) founders more than eight years ago as part of succession planning.
“It is this management team that has grown the business over the course of the last five financial years and we believe the MIS will continue to play a pivotal role in keeping the team motivated moving forward,” Voon says.
As for Stream’s growth prospects, it is best to first understand the company’s achievements to date.
Stream was set up in 1991 and its automated waste collection systems (AWCS) essentially utilise a series of underground pipes to quickly transport municipal or domestic solid waste to a sorting facility a short distance away, which is then collected by rubbish trucks to be sent to landfills, recycling centres or transfer stations.
Notably, Premium Patents owns the patent to the “WasteStream Shuttle” system, which reduces operating costs by up to 70% when compared with existing conventional systems.
Such systems are more efficient and hygienic for waste disposal especially for high-rise buildings.
Almost all modern high-end high-rise buildings today use some form of automated waste collection systems and property developers who use them tout it as a selling point for their properties.
Stream chief executive officer Chea Thean Teik says the company has seen rapid growth, especially over the last five years.
“Our revenue in the recent financial year ended June 30, 2023 (FY23) hit the RM100mil mark, which is 10 times the revenue we achieved in 2004. We were also not making consistent profits back then.
“This is also why when AWC first bought the 51% stake, a three-year profit guarantee of about RM3mil per year was provided, all of which was fulfilled,” says Chea, who joined Stream 18 years ago and was instrumental in setting up its offices in Singapore and Abu Dhabi in the United Arab Emirates.
He adds: “In FY21, we achieved the highest profit after tax of RM24.31mil – more than eight times the profit guarantee provided two decades ago.”
According to Chea, Stream has been involved in multiple projects including landmark ones. It installed the world’s largest AWCS at the Al-Raha Beach Development in Abu Dhabi, a massive waterfront development there that commenced in 2005.
More recently, Stream was involved in the installation of the world’s tallest AWCS at the Merdeka 118 tower in Kuala Lumpur.
Backed with this track record, Chea says the company is eyeing opportunities in large-scale infrastructure developments such as Indonesia’s new capital Nusantara and Saudi Arabia’s ambitious new urban area dubbed Neom – a US$500bil smart city that is envisaged as being car-free and using robots to help residents.
The company is equally optimistic about Malaysia where it has captured the bulk of the market among the three players in the space.
“We have a track record in not just general waste collection systems but also food waste, laundry and linen collection systems at multiple healthcare facilities in Singapore and a few hospitals in China.
“Also in Singapore, we have long built AWCS in their Housing and Development Board housing projects, which we can replicate in Malaysia,” adds Chea.
He says waste management is gaining attention as a crucial aspect in urban and smart-city development and has a strong environment, social and governance theme to it.
“AWCS can be particularly beneficial in highly populated cities, and integrating it within smart cities promises an avenue towards sustainable urbanisation.
“It reduces the risks of accidents, injuries and the spread of diseases associated with traditional waste collection methods,” Chea adds.
Fair valuation
The price AWC is paying for the 49% stake in Stream translates to a price-to-earnings (PE) multiple of 9.59 times Stream’s FY22 earnings.
AWC’s Voon says the valuation is fair given Stream’s growth story.
According to Voon, AWC has collected almost RM45mil in dividends from Stream over the last 12 years, indicating the positive cash flow that the latter is able to churn out.
Furthermore, Stream has RM70mil in cash in its coffers.
“There is immense value in Stream’s WasteStream Shuttle sytem. A blended valuation ex-cash would put Stream at a PE multiple of only 6.8 times (FY22 earnings) considering we acquired the initial 51% at RM9.18mil or a PE of six times, and also taking into account the dividends AWC received over the years,” Voon says.
Because Stream’s business offerings are specialised, profit margins are higher too, averaging 28% in the last three years, he adds.
In FY22, the company posted profit after tax of RM23.42mil. However, profits came in lower at RM16.93mil in FY23.
Chea explains that the lower profits were the result of human-resource and supply-chain constraints that impacted several projects secured by the company before and during Covid-19.
“It is now back to business as usual. Stream’s order book is about RM138.46mil, which should keep us busy for the next three years. Our tender book, meanwhile, is about RM107.11mil,” Chea says.
Reviving AWC’s potential
With regards to listed AWC, it has three other business segments – facilities, engineering services and rail.
In the facilities segment, AWC provides integrated facilities-management services for buildings in the government, commercial and healthcare sectors.
“The facilities division will continue to anchor the group’s revenue in the near term.
“Meanwhile, our engineering division is expected to benefit from the recovery of the construction sector in Malaysia and Singapore. The division has an orderbook of RM90mil as of end-September, providing earnings visibility for next three years,” Voon says.
As for the rail segment, AWC ventured into the business in 2018 following the acquisition of a 60% stake in rail specialist Trackwork & Supplies Sdn Bhd. In October this year, the group exercised its call option to buy the remaining 40% interest in Trackwork & Supplies and this was recently completed.
“We still hold the view that rail-related work is a growth area despite the hiccups following the 14th General Election, which saw a full review of mega-infrastructure projects, and subsequently the impact of Covid-19. We are winning jobs back and have in hand an RM74mil order book,” Voon says.
Touching on AWC’s financials, he says it is now on a “better footing” following a dismal performance in FY23 where net profit came in 90% lower at RM2.13mil from a year ago.
Specifically, its facilities division had slipped into the red in the fourth quarter (4Q) of FY23 – its first loss in history.
“In FY23, we encountered a perfect storm, the culmination of being prudent by making some impairments, and at the same time being affected by higher costs due to the increase in minimum wage and Covid-19,” Voon says.
He adds that the facilities division narrowed its losses in the 1QFY24 and is likely to turn around and return to profit in FY24.
“All in all, AWC’s order book is close to RM800mil, and we are bidding for more than RM700mil in new jobs.
“With Stream and Trackwork & Supplies coming into the fold as wholly owned units, our bottom line will get a boost,” Voon adds.
Shares of AWC closed at 65 sen yesterday, up by 38% year-to-date.
At this level, the stock’s market capitalisation stood at RM209.9mil.
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