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New Growth Pathway for Cleanaway Waste Management

Australia | Mar 14 2022

This story features CLEANAWAY WASTE MANAGEMENT LIMITED, and other companies. For more info SHARE ANALYSIS: CWY

While brokers reacted to Cleanaway Waste Management’s first half results by setting higher target prices, new avenues may be required for the next leg of growth.

-February first half results for Cleanaway Waste Management exceeded consensus estimates
-A margin recovery will require a pass-through of rising costs
-Management unveils the BluePrint 2030 strategy
-Prospects for waste-to-energy

By Mark Woodruff

In mid-February, Cleanaway Waste Management ((CWY)) released first half results that outpaced consensus estimates.

A first half dividend of 2.45cps was underpinned by strong operating cashflow, according to Macquarie.

Management of the integrated waste management and recycling provider guided for second half earnings to be in-line with the first half, excluding the Suez Sydney acquisition completed last December.

Seven of the eight brokers within the FNArena database reacted by setting higher target prices.

Morgans attributed the results to strong revenue growth, particularly in the Solid Waste Services segment. The other two segments are named Liquid Waste & Health Services, and Industrial and Waste Services.

However, the results also showed margin contraction, heightened capital intensity and an unexpected step-up in net debt, noted the broker.

As strong volume growth during the half was offset by higher cost of doing business across all divisions, Citi feels a pass-through of these rising costs will be the key to support a margin recovery.

The costs related to higher fuel and Adblue prices, higher costs in Health Services due to covid inefficiencies and higher commodity shipping costs. The company expects these cost pressures will subside in the second half.

The broker feels the medium-term outlook for the company remains bright and believes rational pricing and consolidation will continue to play out across the Australian Waste industry.

Nonetheless, while UBS feels management has done a great job leveraging M&A to grow, new avenues are required to drive the next leg of growth.

Next leg of growth

At first half results, management unveiled an updated strategy termed BluePrint 2030 to integrate and extend the company’s network of infrastructure assets to provide a high-circularity, low-carbon solution.

Morgan Stanley views the ambition within the strategy positively and expects more clarity from a series of strategy updates to be announced over 2022.

Cleanaway is investing in world-leading technology to recover energy from waste (EfW) while transitioning to a lower-carbon economy, and now intends to hold 100% stakes in EfW facilities in Melbourne and Queensland.

Credit Suisse likes the greater control and future optionality this provides compared to the joint venture previously planned for the Sydney EfW facility, which is under review due to changes made to state government policy.

Importantly for Jarden, mid-term margin targets established under the prior Footprint 2025 are being honoured within the new BluePrint 2030 strategy.

Management confirmed margin ambitions across each of the divisions and can see a path to achieving these targets in the medium-term under a normal “business-as-usual” setting.

The broker, not one of the seven brokers updated daily in the FNArena database, maintained its Buy rating and raised its 12-month target price to $3.20 from $3.10.

Waste-to-energy represents the next key upside for growth, believes UBS, given the defensive core business is largely captured in the current share price. As a result, the analyst feels further M&A will be smaller in nature as the focus shifts to delivering waste-to-energy.

That being said, it’s considered too early to attribute meaningful upside to the company’s valuation from the new strategy due the capex intensity required and the permitting process, explains the broker. Sims ((SGM)) recently put on hold a planned facility in Victoria due to approval uncertainty.

In summary, Ord Minnett noted that national, vertically integrated scale operators like Cleanaway will benefit from an increased waste management focus by government, companies and consumers.

This is likely to come at the expense of smaller operators with limited access to capital and exposure to only some segments of the value chain, points out the analyst.

The FNArena database has seven broker ratings with three Buy and four Hold ratings and a consensus target price of $3.18, which suggests around 10% upside to the latest share price.

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