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Cleanaway Waste is the latest category killer
Cleanaway (ASX:CWY) is Australia’s largest garbage disposal company, providing waste, recycling, industrial and liquids services with a network of state-of-the-art facilities, transfer stations, engineered landfills, liquid treatment plants and refineries. Given what it does, it’s no surprise that Cleanaway is one of the rare companies that came out of the pandemic relatively unscathed. Pre-COVID, CWY was trading at levels of around $1.42; at the time of writing, the shares were trading at $2.23.
How has Cleanaway managed to survive COVID?
For those that don’t know, Cleanaway was initially spun out of Brambles (ASX:BXB) and then acquired Tox Free Solutions to become the 17th largest waste management company in the world. The Tox Free purchase gave it exposure to medical waste management and increased the company’s scale to over 6,000 expert staff and a 5,300 fleet of specialist vehicles across 260 locations in Australia.
According to Morningstar, collecting rubbish is only one part of the game. The key to “establishing a sustainable competitive advantage, or economic moat, in waste management is owning landfills. And for now, this advantage lies with the global ‘heavy hitters’ in waste, the European companies Veolia and Suez.” Landfills are an essential component of Australia’s waste management system – providing a final disposal solution for waste that cannot be recovered. The gas produced as the waste breaks down can be collected to generate energy.
Cleanaway has five landfill licences but none in NSW. The company’s strategy ‘roadmap,’ Footprint 2025, was launched to deal with Australia’s growing population and the increase in waste demand. The project provides a pathway to ensure the country has the necessary infrastructure to cope while continuing to improve resource recovery.
It hasn’t always been smooth sailing for Cleanaway. There have been a few bumps. In February 2020 just prior to COVID, the share price near-halved, due to lower earnings guidance linked to the country’s property downturn. After that however, it’s been smooth sailing, especially through COVID. Shares in the company have risen by almost 60% following an upgrade to earnings guidance and a bumper February profit result.
The pandemic-forced lockdowns may have limited industrial waste but household waste increased. People still put their bins out and that kept Cleanaway busy collecting and disposing waste. Solid Waste Services reported increased net revenue and earnings. At its recent results the company posted net revenue of $713.2 million, up 2.1% due to contributions from new assets and municipal contracts. Underlying net profit came in at $77.9 million, above the consensus expectation of $76 million. Earnings in both solid waste and industrial waste beat consensus. Underlying EBITDA of $198.4 million was 2.8% higher, while the interim dividend of 2.25c was a 12.5% lift on last year.
Overall, it was a solid set of results. Cleanaway proving to be a ‘defensive’ and ‘safe’ position to hold during times of a pandemic. Morningstar says “volumes will remain soft in fiscal 2021, with the economic fallout from covid-19 likely to continue weighing on C&I waste generation. He forecasts fiscal 2021 group EBIT of $264 million, a modest 2.7 per cent increase year on year.”
According to brokers, CWY is a stock that has consistently delivered when other ‘defensive’ exposures have disappointed. Cleanaway falls under its own category, it isn’t a tech stock, nor an industrial. There are currently two buys and five neutral recommendations. Ord Minnett has an Accumulate recommendation with a target price of $2.60. The broker says first-half profit beat its forecasts but it is worried that the company didn’t upgrade FY21 earnings guidance: but it could be that the company was hesitant given the potential for future lockdowns. Overall, the broker says Australia is due for structural change in how it treats the waste issue, and Cleanaway is perfectly positioned for upside potential.
