Should you buy shares in Cleanaway Waste Management?

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"There is no such thing as 'away' - when we throw anything away it must go somewhere." - Annie Leonard, environmentalist and sustainability advocate

Ancient Greeks created waste dumps and required waste to be removed at least one mile from the city.

The concept in society today, is not overly different to the Ancient Greeks.

should you buy shares in cleanaway waste management

Waste is collected and transferred to disposal sites (either nearby or even overseas). The quantum and scale of waste however, makes it immensely more challenging today.

Finite landfill capacity means that Australia (and the rest of the world) will need to develop new disposal and recycling techniques.

Australia has lagged behind most European and advanced Asian countries with waste management.

cleanway recycling
Cleanaway recycling bins. Source: Cleanaway.

This results in more waste per capita, less recycling and ultimately a higher percentage of waste being dumped in landfills.

Going forward Australia will need greater investments in waste management in order to manage the challenges of disposal, environmental sustainability and greenhouse gas reductions.

Cleanaway Waste Management Ltd (ASX:CWY) is Australia's largest waste management company. CWY is able to provide a range of services from the secure collection, treatment, recovery, recycling and ultimately the disposal of waste.

With close to 8000 staff, around 6300 fleet of specialist vehicles, landfills and recovery assets, CWY services a range of customers.

Municipalities, retail and entertainment, mining and resource companies all count on CWY for the disposal of their waste.

Industry changes

Until 2018 many countries including Australia exported waste to China making it the largest importer of waste for recycling.

In 2018, China introduced a drastic National Sword Policy which imposed stringent restrictions on the import of waste. This had substantial effects on the waste management industry in Australia.

Lacking the ability to export waste combined with limited disposal opportunities, Australia faces a challenging task to improve its waste management industry. Recycling and diversions from landfills will be essential.

Customers are also requiring more sophisticated solutions including detailed reporting. The trend towards larger and more complex solutions will be a challenge for the numerous smaller operators in the industry.

CWY as the largest company in the sector is set to benefit not just due to its size but also with its increased spending on technology.

Management is rolling out advanced fleet monitoring systems which will enable better utilisation and reporting of the fleet.

cleanway renewable diesel truck
Cleanaway renewable diesel truck. Source: Cleanaway.

New revenue streams

As the industry develops, new revenue streams are expected to emerge in Australia. The largest being energy from waste.

These will be large scale and complex projects which will utilise waste to generate stable baseload electricity.

Given the limits on landfill combined with limited recycling, it is largely inevitable that Australia will eventually have to pursue these projects.

Overseas markets like the United States have seen a consolidation in the waste management industry. As the scale has increased the larger companies have benefited from strong margins and steady earnings growth.

These trends in the waste management industry indicate CWY is in a prime position to benefit.

Cleanaway management

CWY is led by CEO Mark Shubert who joined in 2021 following general management roles at Origin Energy and Shell (Australia).

Upon joining, he inherited a group of tier one waste management assets operating on the heels of a large industry consolidation event via the merger of French duo Veolia and Suez.

After doing some merger and acquisition-related industry consolidation of their own under previous management, the board and management decided an investment in systems and processes was deemed appropriate to achieve more appropriate returns on the capital deployed.

CWY is now forecasting this investment to pay off, leveraging this investment and driving incremental efficiency gains. This complements other initiatives such as restoration (of existing levels of profits post COVID and extreme weather/fires) and strategic infrastructure growth initiatives. This results in targets for double-digit operating earnings growth out to FY26 and, with the latest round of management incentives, these growth rates continuing into FY27.

Almost 500 senior leaders within the business are incentivised to achieve these outcomes via long-term incentives. Despite a relatively challenging macroeconomic environment, the company has consistently reiterated these targets in recent company releases.

Returns and valuation

CWY has been a steady performer, outperforming the ASX200 over the past five years.

Its performance has been challenged by a tight labour market post COVID-19 which continues to improve.

cleanway total return
Figure 3: Total Return in $AUD. Source: Bloomberg.

CWY is a unique stock in the Australian market, lacking a listed peer.

It is currently trading at 11x cashflow, 10x EV/EBITDA whilst providing a 2% growing dividend. Based on current forecasts, operating income is expected to grow over 15 per cent over the next 2 years.

Recommendation

The unique assets and significant barriers to entry make the waste management industry attractive for investors.

The risks of a capital-intensive business like waste management can be managed by a well aligned management team as possessed by CWY.

We anticipate that CWY's market share will continue to increase providing further economies of scale.

Valuations remain compelling for these growth opportunities at CWY making it an attractive investment proposition.

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Simon Brown is an investment analyst at Tribeca Investment Partners. He is co-portfolio manager of the Tribeca Smaller Companies Strategy. Simon has a Graduate Diploma in Applied Finance and Investment from the Financial Services Institute of Australia. He also has a Bachelor of Arts degree majoring in Government and Business and Modern History from the University of Sydney.