Cleanaway Extracting Value From Waste

This story features CLEANAWAY WASTE MANAGEMENT LIMITED. For more info SHARE ANALYSIS: CWY

Cleanaway Waste Management guides to improvement in FY17 across all divisions and flags the potential for bolt-on acquisitions.

-Collections to benefit from recent landfill acquisition in Melbourne
-Path cleared for focus on day-to-day operations and cost control
-Improvement expected following closure of Clayton landfills
 

By Eva Brocklehurst

Cleanaway Waste Management ((CWY)) is garnering efficiencies and implementing on its growth initiatives, noting early signs of improvement in customer churn rates.

The company guides to an improved outcome in FY17 across all its divisions, with no expected change in market conditions, and also flags the potential for bolt-on acquisitions. Volumes were mixed in FY16 with non- hazardous liquids increasing and hazardous liquids declining. The company also notes continued price pressure from competition.

Morgans has no fears regarding the outlook and asserts that, despite the rally in the share price, there is more upside to come. The broker believes the margins in the second half, the small scale acquisitions and the contract wins all support an improved outlook and makes material upgrades to forecasts.

Forecast upgrades to the liquids & industrials segment reflect strong margin improvement and Morgans calculates the wins such as the Rio Tinto Yarwun contract will offset oil price pressures. The broker cites a staff publication that indicates this is a three-year contract which is expected to contribute $17m per year for the provision of industrial services and waste management.

Morgans estimates that the Melbourne Regional Landfill (MRL) acquisition could have added $58m in revenue in FY16. All Clayton landfills are now expected to close at the end of 2017, resulting in the establishment of a new transfer station in south east Melbourne.

Earnings (EBIT) are expected to increase following the closure of Clayton, which Morgans understands is mainly because of the transporting of SE Melbourne volumes to the MRL and a cessation of Clayton’s large depreciation expense.

Acquisition opportunities are expected to be mostly small players with the company believing real synergies are available in depot rationalisation, insurance and asset utilisation. In July the company acquired Waste 2 Resources for $8.5m, a waste collection service operating in south east Queensland. It also acquired the non-controlling interest in Cleanaway refiners for $2.6m having previously held a 50% controlling interest.

Morgans expects Cleanaway to deploy its balance sheet into alternative waste treatment in Sydney, given the NSW government’s landfill levy incentive. The company believes it has the collection infrastructure for waste feedstock already but has no plans to be a pioneer of technology.

Nevertheless, it expects to evolve from a waste management business to a material management and industrial service and considers extracting value from waste will be critical to the future.

Cleanaway has a credible strategy, Macquarie believes, and collections should benefit from the recent landfill acquisition in Melbourne and the associated volume transfer. The broker also expects the industrial division to improve because of cost reductions but that this will remain challenged by economic conditions and lower oil prices.

The company’s uncommitted volume in the Sydney market could become an asset, Macquarie contends, given Sydney is the most likely market where alternatives to landfill would be economic. Sydney’s landfill levy is over $100/t more than the nearby Queensland market, the broker notes, and this is affecting competitive outcomes at the small end of the collections market.

UBS wonders whether the company is at the start of an upgrade cycle and expects, based on the initiatives being undertaken across the company’s various segments, an increase in operational earnings should be forthcoming in FY17.

With management in the past having dealt with a number of significant strategic issues the path is now clear for current management to focus on the day-to-day operations and deliver cost-reduction benefits to shareholders, UBS asserts, acknowledging some of the cost reduction benefits will be mitigated by competition.

Despite the stock appearing expensive on a headline multiple basis, the broker expects momentum should allow it to outperform. Revenue is expected to grow at a 5.6% compound rate over FY16-19.

Ord Minnett also considers the risk for the stock is to the upside, given the focus on capital allocation and customer engagement, and with a number of restructuring projects in train. The hardest task will be growing the top line, the broker maintains, and arresting the loss of market share suffered over the past couple of years.

FNArena’s database has four Buy ratings and one Hold (Deutsche Bank). The consensus target is $1.10, suggesting 2.3% upside to the last share price. This compares with 85c ahead of the results. Targets range from $1.00 (Deutsche Bank) to $1.15 (UBS).
 

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