Weekly Reports | Apr 23 2021
This story features CLEANAWAY WASTE MANAGEMENT LIMITED, and other companies. For more info SHARE ANALYSIS: CWY
Listed waste management options that are not rubbish
By Tim Boreham, Editor, The New Criterion
Not for the first time, the listed waste management sector is in the throes of ownership upheaval as investors await the fallout from this month’s proposed $20bn merger of the French-based giants Veolia Group and Suez Group.
The outcome has direct implications for the largest ASX listed waste manager, Cleanaway Waste Management ((CWY)).
In the meantime skip operator Bingo Industries ((BIN)) is subject to a tentative $2.5bn buyout offer from private equity group CPE Capital.
Whatever the outcome of these corporate plays, investors need to take a broader stance on gaining exposure to a sector that’s more about recycling and energy co-generation than chucking stuff on to tips (sorry, waste transfer stations).
At a macro level, the waste management game is a no-brainer in terms of investor appeal. We’re not producing any less detritus – in fact we produced much more during the lockdowns – and the business is by way of reliable and long term contracts.
The trouble is, the conventional listed options are shrinking. As mentioned, Bingo is in play while the resource sector-oriented Tox-Free Solutions and tip operator Baxter earlier were subsumed by Cleanaway.
Cleanaway by the way was once owned by Brambles ((BXB)) but was swept up by Transpacific Industries which changed its name to the better known Cleanaway.
TPI also picked up Waste Management NZ, which made the company the biggest waste operator on both sides of the Ditch.
Tox itself grew via multiple acquisitions, including medical waste specialist Daniels Health.
Veolia and Suez are heavyweight players here, but not listed locally. Otherwise, the sector is highly fragmented with thousands of private operators.
For investors in Cleanaway, the go-to ASX exposure, it’s a case of waiting to see how the in-principle Veolia-Suez merger pans out.
On April 6, Cleanaway said it would purchase Suez’s Australian recycling and recovery business for $2.52bn, but a Veolia-Suez merger kyboshes the deal.
However Cleanaway also entered a side deal to buy seven Sydney assets from Suez (five transfer stations and two landfills) for $501m. The trouble is that putative partner Veolia has criticised the deal as giving away the assets at a “knock down price”.
Cleanaway expects this deal to proceed and – helpfully – the Sydney assets are just the ones the competition regulator would demand to be divested as a condition of approving the Veolia-Suez union.
Cleanaway investors liked the initial $2.5bn proposal: the shares soared 16% to $2.55 on the day and they have largely held their gains. This implies that investors remain confident of Cleanaway seizing the supplementary prize (the Sydney assets), or the Suez-Veolia merger ending up blocked (like the namesake canal a couple of weeks ago).
Meanwhile, Bingo holders are awaiting a promised update on the status of CPE Capital’s “highly conditional and non binding” offer $3.50 a share cash offer, grudgingly confirmed by Bingo on January 19 following market speculation.
Scenarios include a firm deal not materialising – as happens all the time with private equity – or a contested takeover.
At last glance the shares were trading around $3, which implies punters are taking a cautious view on CPE having its name-o on this Bingo.
On consensus earnings expectations for the 2021-22 year Bingo trades on a multiple of 34 times underlying earnings, compared with around 22 times for Cleanaway (which is expected to undertake a modest capital raising to pay for the Suez assets).
However Bingo was more affected by the pandemic and has been expanding capacity, so has more scope to grow earnings.
Shaw Stockbroking values a merger-less Bingo at $2.80 a share, while Ord Minnett and Goldman Sachs reckon Cleanaway’s current price of around $2.50 just about does it.
Neither stock is rubbish in our view, but there’s not much upside if the corporate manoeuvres don’t work in their favour.
Dumpster diving for better value
The bourse abounds with small-cap waste management plays, but they’re more about recycling and co-generation than collecting the bins.
The Perth-based bioenergy developer Delorean Corporation ((DEL)) listed robustly on April 12, after an oversubscribed $14m raising.
Delorean’s box of tricks includes the Delorean Energy Victoria One bioenergy project in Stanhope, which aims to convert 40,000t of putrescent waste annually to 1.2MW of energy. The board boasts former Tox Free Solutions chief Steve Gostlow.
In Queensland’s Lady Cavendish country, Papyrus Australia ((PPY)) has been using the waste trunks of banana palms to produce packaging, furniture and veneers for objects such as musical instruments.
Originally targeting the boutique paper market, Papyrus has been plugging away for years but managed a modest ($180,000) profit in the last half. Investors have at last gone bananas on the story with the shares surging 400% over the last year.
Further afield, Range International ((RAN)) produces pallets from recycled mixed-waste plastic at its facility at East Java in Indonesia. The pallets are an alternative to the wooden variety commonly made from rainforest timber.
Having reported revenue of $US1.4m ($2.1m) in calendar 2020 and a loss of -$US3m, Range faces the age-old challenge of obtaining meaningful scale and accruing enough capital to do so.
Eden Innovations ((EDE)) is a more oblique exposure to the US waste transfer market via its ultra-strength concrete additive Edencrete.
Eden is providing a concrete tipping slab to a waste facility in Georgia, which marks Eden’s first foray into the $US50bn US waste management sector.
To date, Eden has been involved in rebuilding roads and bridges.
Eden notched up revenue by one-third to $1.58m in the December half, but the shares have lost -85% of their value over the last five years.
Waste water treatment is a listed sector within its own. Exposures include the US-based global group Fluence ((FLC)), which melds its proprietary aeration technology with off-the-shelf products.
Fluence turned over a meaty $$US97m in the first half, with an underlying profit of $2m and reported loss of -$7m.
Perversely, but not unusually, Fluence shares were worth more than double their current value five years ago, when the company was pre revenue.
Hazer Group ((HZR)) is well known as a rare listed exposure to the go-go hydrogen market.
The company’s current plans revolve around producing hydrogen from sewage (biogas) at Perth’s Woodman Point wastewater treatment plant.
Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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For more info SHARE ANALYSIS: BIN - BINGO INDUSTRIES LIMITED
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For more info SHARE ANALYSIS: DEL - DELOREAN CORPORATION LIMITED
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For more info SHARE ANALYSIS: FLC - FLUENCE CORPORATION LIMITED
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For more info SHARE ANALYSIS: PPY - PAPYRUS AUSTRALIA LIMITED
For more info SHARE ANALYSIS: RAN - RANGE INTERNATIONAL LIMITED