Cleanaway Waste Management

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

23 August 2016, 12:15 PM

Sectors Covered:

Infrastructure, Utilities, Banks

FY16 result summary

EBITDA for Cleanaway Waste Management (CWY) increased 22% and beat our forecast by 3%. Underlying revenue growth of +1.5% was 0.5% slower than forecast. A strong cost-out performance (albeit $9m from lower fuel costs) drove a 350bps increase in underlying EBITDA margin to 21.3%. Depreciation and Amortization (D&A) of $159m was less than guidance of ~$165m, contributing to a 26% increase in EBIT and a 14% beat of our forecast. Capex of $154m was less than forecast but explained by guidance of capex less than D&A. High quality management is evident in the result. 

The key negative was the $11m decrease in the landfill remediation provision after $45m of remediation spend in FY16.

Company outlook indicates continued earnings growth

Company guidance is that "Market conditions are expected to show little change from those experienced during the past year. However, based on the company wide initiatives we are undertaking, both our Solids and Liquids & Industrial Services segments should report increases in operating earnings in FY17." 

Cleanaway continues to target a permanent $30m cost reduction by FYE-17, with cost-out already evident in FY16. Guidance is for FY17 capex to be less than D&A of ~$165-170m. Landfill remediation spend is targeted at $40-45m pa in FY17-20.

Material upgrades to forecasts

We have made material upgrades to our forecasts, reflecting the 2H16 result (including the much improved 2H16 margins) and reinforced by the outlook statement. We also have factored low GPD+CPI-type revenue growth into the medium term outlook for the Solids segment compared to a flat profile previously. Forecast upgrades to the Liquids & Industrials segment reflect the strong margin improvement, with contract wins like the Rio Tinto Yarwun offsetting oil price pressures. 

Our group growth forecasts for FY17-19 are 3% pa underlying revenue, 5.7% pa EBITDA, 15% pa EBIT, and 19% pa EPS over FY17-19. We forecast double-digit DPS growth, albeit yield is not a key part of our forecast investment return.

Balance sheet looks healthy, room for growth

Drawn net debt; EBITDA of 1.3x (1.1x on a balance sheet basis) provides plenty of room within management's target gearing of 2.0x to pursue growth initiatives and/or capital management. We forecast free cashflow to improve from $28m in FY16 to $34m in FY17.

Investment view

Driven entirely by our forecast upgrades, we increase our share price target and upgrade our recommendation from Hold to Add.

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