Australia | Jun 15 2022
This story features CLEANAWAY WASTE MANAGEMENT LIMITED. For more info SHARE ANALYSIS: CWY
Cleanaway Waste Management has outlined growth opportunity in the waste-to-energy market, but investors are warned costs will increase sizeably in coming years to accommodate it.
-Cleanaway pursues growth with $2bn waste-to-energy investment
-Costs to increase $15m annually to support growth initiatives
-Carbon goals should provide further opportunity for investors
By Danielle Austin
With Cleanaway Waste Management ((CWY)) pursuing sizeable growth and a competitive advantage, the company has guided to a permanent $15m increase to annual spending, reflecting a 60% increase to previous costs. The company is pursuing growth through to the end of the decade across six pillars, notably including the waste-to-energy market, representing its continuing investment in a broad range of long-term waste infrastructure opportunities.
The company has highlighted the waste-to-energy sector as its largest investment opportunity, and outlined an intention to build WTE facilities in both Victoria and Queensland. With Cleanaway guiding to capital expenditure requirements of $0.7-1.0bn per facility, or a combined investment of $1.4-2.0bn, over the coming five years, the WTE investment alone represents a doubling of Cleanaway’s tangible asset base.
The facilities will use residual waste otherwise marked for landfill to fuel power generation, and with the company anticipating each of these facilities will deliver a 300-500,000 tonne capacity annually, Cleanaway’s landfill sites should also benefit from some reduction in volume and therefore an extended life expectancy. The company has suggested it will utilise low-emission technology modelled by similar projects in Sweden and Ireland to operate its WTE facilities, with 85-90% of revenues to come from gate fees. Notably, the company highlighted that both sole and joint ownership of these facilities remained options for the company.
Opportunity outside energy-from-waste
The company outlined six pillars of targeted growth within its strategic plan, including construction and demolition, plastic recycling, food organics & garden organics (FOGO), and broadly growing collection capacity.
Within the construction and demolition space the company believes there is further potential opportunity, with the Victorian and Tasmanian awards both due in the first half of FY23. Some market analysts anticipate the company will focus on the Melbourne and Brisbane sectors, both regions where significant market share gains remain a possibility.
The FOGO market also presents one of Cleanaway’s fastest growing opportunities, with local councils looking to implement schemes encouraging increased FOGO recycling. Investment in the market is also significantly less than what is required for the larger WTE opportunity, but has potential to offer meaningful returns if the company can secure sizeable market share.
The company’s strategic plan also outlined the importance of carbon targets to both its 2030 and 2050 strategic plans, and emissions goals will be announced in August. With Cleanaway’s current emissions derived 79% from methane and 21% from carbon dioxide the company sees landfill gas capture as an opportunity moving forward.
With four of the brokers within The FNArena database updating on Cleanaway following the company’s growth strategy deep-dive, two are equivalent Buy rated, one is Hold rated and one is equivalent Sell rated, with a combined average target price of $3.09.
Morgans has issued decreases to its earnings forecasts for Cleanaway given the anticipated higher costs, and notes this drives a -9 cent per share decrease to its valuation of the company, and remains Hold rated with a target price of $2.79. The analysts from Morgans like Cleanaway’s leading market position, and note their valuation is yet to take into account upside from the company’s intended strategic investment. The Morgans analysts also believe the company’s current share price does not accurately reflect the company’s capital and competitive intensity and cyclical earnings, as well as the finite nature of landfill assets.
Credit Suisse, which cut its rating on Cleanaway to Underperform from a previous Neutral, holds a target price of $2.60. The broker anticipates the majority of the waste-to-energy investment will take place in FY25 and FY26, preparing for operations to commence in FY27. Within the construction and demolition sector, Credit Suisse anticipates Cleanaway will focus on the Melbourne and Brisbane markets, where competitors are yet to solidify a strong presence. Accounting for higher costs, Credit Suisse downgrades earnings per share expectations around -8% in both FY23 and FY24.
While Morgan Stanley finds the market is undervaluing the importance of a well-rounded environmental, social and governance (ESG) performance to Cleanaway, it notes the company’s existing circular economy exposure is already well received by the market, and expects further environmentally aligned targets will benefit the company. Morgan Stanley highlighted part of the company’s additional annual $15m expenditure will be spent on expertise in carbon and sustainability which should offer a future competitive advantage. On the back of Cleanaway’s strategy update, Morgan Stanley has retained an Overweight rating on the company and a target price of $3.30.
Macquarie analysts highlighted the company’s WTE opportunities will add to the attraction of an already high-return investment. The broker particularly noted Cleanaway’s resilience in a recently volatile market, and expects this will continue. Macquarie finds the company well positioned to capitalise from the multitude of waste investment opportunities available to it, but does note the funding structure of investment is still being firmed up. Macquarie is Outperform rated with a target price of $3.65.
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