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Why Soul Patts just invested in Bingo Industries Ltd shares

I am very interested in following the moves of Australia’s best performing investment managers. If top managers manage to beat the Australian index over the long-term then it’s worth considering if anything they buy is worth a place in our portfolios.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) delivered a total shareholder return of an average of 11.9% per annum over the past 10 years to 31 January 2018 compared to the All Ordinaries Accumulated Index’s average return per annum of 5.2%.

Soul Patts invests large amounts of money into big companies like TPG Telecom Ltd (ASX: TPM) and Brickworks Limited (ASX: BKW). However, it also makes investments into smaller businesses which results in Soul Patts being a major shareholder.

A couple of weeks ago Soul Patts announced to the market that it now owns 5.11% of Bingo Industries Ltd (ASX: BIN). Bingo is a waste management and recycling business that operates in Sydney and Melbourne.

There is a general tailwind for Bingo in that as Australia’s population grows waste management businesses have more theoretical businesses, schools, services and households it can provide a service for. It needs to win the contract before it can supply a service.

In its recent half-year report Bingo reported a good set of numbers, which it attributed to strong organic growth. Net revenue grew by 43.2% to $142.4 million and pro-forma earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 40.1% to $43.8 million.

Waste management is a growing industry but there are negatives to consider as well. Unless Bingo can offer a better service than its main competitors it may have to compete on price in the future. A price war wouldn’t be good for profit margins, so it’s worth keeping an eye on Bingo’s EBITDA margin as the business grows and when it has to win its current contracts again.

Foolish takeaway

Bingo is currently trading at roughly 28x FY18’s estimated earnings. This seems like a reasonable price to pay for a business that is growing strongly organically and it can also acquire other businesses as well.

However, I’d much rather put my money into this top stock for its growth potential compared to Bingo.

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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Brickworks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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