Small Caps | Dec 07 2017
Waste management and recycling business Bingo Industries has picked up several acquisitions to further expand its services and brokers suggest it is well primed to stay ahead of the competition.
-Acquisitions considered sound, fitting well within existing strategies
-Strong macroeconomic drivers in the company's markets
-Shaw and Partners expects maiden dividend in first half of FY18
By Eva Brocklehurst
Waste management and recycling company Bingo Industries ((BIN)) is growing its presence in Victoria, having established a diverse, vertically integrated operation in NSW. The company has picked up several acquisitions including National Recycling for $51.1m and Patons Lane Recycling Centre & Landfill for $90m.
Guidance for $89m in operating earnings (EBITDA) is reaffirmed and contributions from the acquisitions should add an additional $4m. Brokers believe the acquisitions are sound and fit well within the existing strategy, while Macquarie expects the landfill solution is a longer-term positive. The main risk now lies in executing on the significant growth profile and bedding down the acquisitions.
The acquisition of National Recycling, centred in Victoria, includes two freehold properties with expected synergies of $6m to be realised within 12 months. Patons Lane is a significant greenfield expansion in western Sydney, in Macquarie's opinion, which would be paid for over three instalments of $30m between December 2017 and July 2019.
Patons Lane is expected to open in FY20 and already has a development approval. The site will require an additional $40m in capital expenditure to become operational. Vertical integration will capture margins associated with ongoing landfill expenses and Macquarie believes the company should be positioned well, should regulatory change occur in Queensland. Queensland is expected to implement a levy to encourage recycling and reduce the amount of waste going to landfill.
A $120m entitlement offer will fund the acquisitions as well as six redevelopments, four in NSW and two in Victoria, for total expenditure of $29.5m. This should add 50% to the network capacity by 2020. The raising will also repay the debt from the Has-a-bin acquisition ($6m).
Macquarie considers National Recycling was a logical takeover target, as Bingo Industries is intent on increasing its exposure to the Victorian market. Historically, this business appears to be primarily focused on waste collection with post-collection capacity expected to come on line in the March quarter next year. Macquarie has an Outperform rating and $2.66 target on the stock.
Ahead Of The Game
Shaw and Partners has initiated coverage with a Buy rating, medium risk rating and target of $2.90 and flags the fast growing, diversified business as an innovator in technology, with recovery rates that are second to none in the industry. Financial metrics are attractive and the broker forecasts FY18 operating earnings of $94m, slightly ahead of guidance. This represents growth of 47% on the prior year.
Strong and attractive returns of over 20% are calculated, which is considered a exceptional result for a capital-intensive business in a very competitive and highly commoditised industry. Shaw expects a maiden dividend in the first half of FY18.
There are strong macroeconomic drivers for the company's markets, the broker notes, in both NSW and Victoria, such as population growth and the investment in buildings and infrastructure. The company has a leading position in building & demolition waste collection and processing in Sydney and is expanding its presence in the commercial & industrial segment.
Also, regulation is increasing and this raises barriers to entry, Goldman Sachs observes, and landfill capacity is falling. Governments and customers are demanding higher recycling rates and stricter compliance on environmental standards.
The company has built strong systems and operations to stay ahead of competition, the broker notes, and waste collection volumes are expected to grow at a 5% compound rate over 10 years. Moreover, the company has exposure to large-scale infrastructure projects.
Goldman Sachs has a $3.40 target and initiates coverage with a Buy rating, conceding further contracts, particularly in building & demolition, could drive earnings above forecasts. Moreover, exposure to $143bn worth of NSW and Victoria's state budget infrastructure expenditure should outweigh any residential construction slowdown. The broker forecasts 100% operating cash flow/operating earnings conversion, as the company has minimal working capital requirements.
Total capital expenditure, excluding acquisitions, is forecast to average 138% of depreciation as capacity in post-collections is increased and the advanced automated recycling technology is implemented across the network. The post-collections network is 56% of FY18 estimated earnings, with facilities situated in strategic growth corridors and based around locations where waste is generated.
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