- Cleanaway Waste Management's (CWY) share price has declined by almost 20% from its high in August.
- We hosted CWY at the Morgans QLD Conference in mid-October. Our impression was management was confident in the future growth of the company. Nothing stood out as a major concern or threat that explains the share price decline.
- We think consensus EBITDA estimates for FY19 may be 3-4% too low. Our 12 month target price lifts 3 cents per share as a result of forecast upgrades.
- Key investor events are the AGM today (25 October), Investor Day (22 November) and the 1H19 result (February 2019).
Morgans conference presentation
The CEO explained how scale delivered operating leverage off growing recurring revenues. CWY's recent record of large contract wins continues, snaring the City of Sydney (starts FY20 for 7 years) and the logistics element for Queensland's Container Deposit Scheme. While management is focused on extracting synergies from the TOX acquisition, it will not compromise the existing business. The timing of the ERP system changeover is the key reason the $35m per annum synergies target will take 2-3 years to achieve (note that management is incentivised to exceed this target). We were interested in management long-term incentives of 13-18% EPS CAGR across FY19-21 and 1-2% improvement in NPAT (pre-financing) ROIC by FY21 over FY18, which the CEO said tied in with CWY's strategic plan.
CWY sees signs that the construction boom in Sydney is coming off the boil, albeit CWY has minimal direct exposure to the construction and demolition waste market in that region. The implementation of the Queensland landfill levy from Marcy 2019 is likely to impact Post-Collections but benefit Collections. The CEO also discussed technology (as an enabler not a disruptor) and contract resourcing.
Forecast revisions and outlook
In its August result briefing, CWY said it was comfortable with FY19 consensus EBITDA expectations of approximately $450m (+32% on the previous corresponding period). We think this is conservative. Annualising 2H18 earnings, accounting for organic growth in the combined business and initial delivery of margin under major contract wins, and allowing for the start of synergy extraction delivers a 3-4% beat of this outlook.
We upgrade our EBITDA forecasts by 4% in FY19 (to $469m), and 1-2% across FY20-22F. Thus, we target 38% EBITDA growth in FY19 and 6-7% pa CAGR across FY20-24F.
Forecast upgrades lift our June 2019 valuation by 3 cents per share. The EV/EBITDA implied by our valuation is 8.7x, well bellow the 10.7x EV/EBITDA that the largest USA waste management companies are currently trading on with 4-5% pa EBITDA growth outlook. Such multiples for CWY requires 4% instead of 3% pa terminal value growth (holding all else constant), but would increase our valuation to $2.38 per share. This highlights the upside potential if the market were to become increasingly confident in the risk and growth profile of the company.
Key risks include TOX integration, waste market activity, regulatory, competition, asset life, M&A, cost control, capital management and tax.
The recent share price decline provides a buying opportunity, with total potential return over the next 12 months of approximately 14% (attractive given the growth and risk profile). As such, we increase our share price target and upgrade our recommendation from Hold to Add.
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