Cleanaway – a new inclusion in our High Conviction list
Australia's growing population and high waste generation per capita, as well as the growing importance of sustainability in household, business and government decision-making, should see waste management become an increasingly valuable sector, with Cleanaway Waste Management (CWY) the Australian leader.
CWY's competitive advantages include its market share leadership in collection volumes, the diversity of its operations and customer base, and its waste management facilities including landfills and resource recovery sites (some of which require licenses from Environmental Protection Agencies to operate). What is also attractive is that CWY can get paid twice – for collection of waste and for on-sale of recovered waste (eg. waste to energy).
While we do not view CWY's acquisition of ASX-listed Toxfree as compelling, the acquisition (including cost-out synergies) will contribute to future earnings growth along with organic sources and announced major contract wins.
CWY also has exposure to a rising oil price via its waste oil refining assets.
Vik Bansal, CEO of Cleanaway, discussed CWY's market leadership and the strength of recent operating performance with the Morgans network recently.
You can watch the presentation here:
Forecasts, valuation and key risks
Forecast changes are immaterial. We expect relatively defensive and solid earnings growth, with approximately 7% EBITDA growth in FY18 and approximately 15% pa CAGR across FY19-22F. Earnings per share growth is more difficult to forecast due to TOX acquisition accounting (we currently expect approximately 19% pa CAGR across FY19-22F).
Key risks to our investment view include TOX acquisition-related risks (completion, integration, synergy achievement) and ongoing business risks (cost control, economic conditions, regulatory, competition, M&A, capital management, recycled commodity and every price risk).
We retain our Add recommendation and include Cleanaway in our High Conviction stock picks for April.
Morgans clients can login to view our detailed report for Cleanaway Waste Management (CWY). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.