Cleanaway’s Efforts Not Wasted

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

Cleanaway Waste Management is facing competition in the rubbish business, but analysts are confident the company’s efficiency drive can push earnings towards an ambitious goal.

-Cleanaway Waste Management posted a beat on FY24 earnings in August
-Share price has slumped ever since
-Competition is growing, forcing efficiency improvement
-Mission 500 on track

By Greg Peel

Cleanaway Waste Management’s ((CWY)) business is not just a load of rubbish. Along with collecting general waste and recycling, the company deals with hazardous waste, liquid waste, waste from construction and demolition, industrial activity and health services, as well as organic and e-waste.

Cleanaway is Australia’s leading waste services business, but in today’s waste-conscious society, competition is growing.

Back in late August, the company delivered an FY24 result described by brokers variously as “strong”, “robust” and “solid”, beating consensus earnings forecasts and guidance. “Cleanaway’s management continues to demonstrate its operating prowess and ability to articulate and execute its strategy into FY26 and to its 2030 [restructuring] goals,” suggested Jarden. The operational performance lift has been strong, Macquarie noted, with the heightened focus on earnings measurement yielding good outcomes.

Cleanaway’s share price rallied 12% through August ahead of the FY24 result. With the ASX200 threatening to post a new high, it has since fallen -7%.

Mixed Rubbish

The company posted 8% overall growth in earnings (EBITDA) year on year in the second half with a 6% increase for Solid Waste Services and 43% for Liquid Waste & Health Services, ahead of expectations, while Industrial Waste Services disappointed in falling -10%. While there were some tailwinds from, of all things, Old Corrugated Cardboard in the second half, the core drivers of growth (Health & Solid pricing) signal management’s ability to drive operational efficiency in the broader business, UBS notes.

It was a good performance in the face of competition from Queensland-based rival Veolia, but landfill competition continues, particularly in Victoria, with volumes dropping substantially, while Industrial is facing challenging market conditions, resulting in deferrals, delays, cancelled projects and major site closures.

Competition in post collections has lifted in Victoria but this has coincided with a downturn in construction and development waste, lower soil volumes and the impact of the food and garden organics transition in Victoria, removing the predominant waste stream from municipal solid waste (MSW), which has accentuated some of the margin decline in Jarden’s view.

Based on Jarden’s conversations with management, the business is increasingly shifting away from MSW (typically ten-year contracts) and increasingly focusing on commercial and industrial waste, which while having shorter contract lives (three to five years) may provide a superior earnings/margin mix to Cleanaway.

Cleanaway’s turnaround has momentum, Goldman Sachs suggests, with restoration some two-thirds complete, strategic infrastructure benefits to flow through and operational efficiency wins starting to show. However, work still needs to be done to complete the fleet transformation, integrate data/advanced analytics and optimise branches.

Mission Not Yet Accomplished

Management has maintained an FY26 earnings (EBIT) target of $450m, with a long-term incentive range of $425-500m, or if you like a “stretch” target of $500m which Cleanaway calls “Mission 500”.

Increasingly, management is talking to “Mission 500” but this is yet to translate into any meaningful adjustment to the FY26 ‘stretch target, Jarden notes. The broker sees management’s ambition as largely relying on operating leverage to hit the FY26 target, which is driven predominantly by Solid Waste Services earnings leverage (around 67% of group), which is subject to increased competition.

Consensus has FY26 earnings of $477m above guidance but below the stretch target. A key highlight was the operational performance which is gaining momentum, Macquarie suggests, while the FY25 outlook supports FY26 target attainment.

On the other side of the coin are costs. In addition to EBIT guidance, Cleanaway also provided FY25 guidance for net finance costs which were a negative surprise driven by higher cost of debt and lease financing, increased capex (maintenance costs higher than Morgans had assumed), tax payments and underlying cashflow adjustment.

There is also provision on the balance sheet for FY25 landfill remediation and rectification spend. Reflecting on Cleanaway’s guidance, Morgans lifts its EBITDA forecast and downgrades profit by -7% given higher finance costs, and downgrades operating cashflow by -11%.

Management’s interest cost assumption is predicated on no further rate rise from the RBA.

Caution Required?

Macquarie believes Cleanaway’s growth visibility is improving as operational performance lifts. The FY24 result points to the strength of execution improvement, with strong margin progression. The medium-term growth profile is building out too, supporting Macquarie’s Outperform rating.

Bell Potter thinks visibility on Cleanaway’s “Mission 500” (which was previously 450) target by FY26 has lifted, with management having secured work in new end-markets, shown early Operational Excellence delivery in NSW Solids, and proven a focus on mix discipline in landfills. Bell Potter retains a Buy rating.

FY25 guidance suggests a fairly easy growth profile to the FY26 target, UBS suggests. Following 19% EBIT growth in FY24, the midpoint of guidance implies a growth moderation to 14% in FY25 and a further step down to 10% in FY26 to hit the bottom-end $450m target. UBS believes this highlights the conservativeness of the $450m EBIT target in FY26 with the broker’s assumption of a more consistent growth rate in FY25 and FY26 which would see Cleanaway hit $500m. UBS also retains Buy.

Morgan Stanley anticipated in the wake of the FY24 result there would be a “neutral reaction” from the market. This has not been the case, and Morgan Stanley has an Overweight rating, but with the caveat of a “cautious” industry view.

Morgans likes Cleanaway’s leading market positions, Solid Waste Services and Health Services businesses, operating leverage, cash generation, contribution of infrastructure assets, and participation in waste resource recovery (which is somewhat underwritten by state government landfill levies).

Valuation headwinds lay in the competitive and capital intensity and cost of capital of the business and the finite life nature of its infrastructure assets. Key catalysts to watch for are evidence of de-gearing and operational improvement, leverage to economic conditions, and deployment of capital into value-accretive projects, the broker suggests.

On the strength of the share price heading into the result, much of which has since been lost, Morgans downgraded to Hold from Add.

That leaves four Buy or equivalent ratings from brokers monitored daily by FNArena covering Cleanaway. The consensus target is $3.16, but if we take out Morgans’ low-end $2.83, consensus lifts to $3.24.

Not monitored daily, Goldman Sachs points out heading into the FY24 result, consensus had Cleanaway’s FY26 EBIT at $472m, so with that now lifting to $477m, much of the upside may already be priced into the stock. Goldman thus retains Neutral, with a $3.00 target.

With Jarden’s core earnings estimates ahead of consensus over FY25-FY26, this broker sees Cleanaway’s share price approaching fairer risk/reward symmetry for investors, and thus also maintains a Neutral rating, with a $3.05 target.

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