While typically considered a defensive exposure, Cleanaway Waste Management (ASX:CWY) shares have failed to gain traction over the last couple of years. This is due to several factors including intense competition, significant capital expenditure (CAPEX) requirements and evidence of inefficiencies across some operations.
The Company has set an ambitious earnings growth target out to FY26. These are presently not being factored into consensus estimates. We recently researched CWY in The Dynamic Investor to assess the potential for upward revisions in consensus estimates. Alternatively, are there other catalysts that can push CWY shares higher?
About Cleanaway Waste Management
Cleanaway Waste Management is an Australian-focused industrial, waste and environmental services company, which operates in three segments: Solid Waste Services, Liquid Waste & Health Services, and Industrial & Waste Services. These three segments encompass ten strategic business units.
The revenue base is largely underpinned by long-term contracts across all sectors with a geographically diverse customer base. These include municipal councils, hospitals, infrastructure, resources, commercial and industrial customers.
Key Fundamental Drivers
CWY has previously outlined an earnings (EBIT) target of $450m+ by FY26. Following the 19% EBIT growth reported in FY24, CWY’s EBIT guidance for FY25 implies that only ~10% EBIT growth is required in FY26 in order to reach the FY26 EBIT target. Accordingly, the FY26 EBIT target appears conservative. As such, the Company is aiming to achieve FY26 EBIT of closer to $500m, which implies ~22% growth on FY25.
The Company has implemented several strategies to lift EBIT to $500m. These include the flow through of strategic infrastructure benefits, contract wins and operational efficiencies. However, the key consideration for investors is when this upside can be achieved, as opposed to whether it can be delivered. There is still work to be done to complete the fleet transformation, integrate data/advanced analytics and optimise branches.
Competition Headwinds
The Company has reported increased competitive intensity with their largest, vertically integrated competitor, Veolia. Landfill volumes were down -8.7% in FY24, which was mainly in Melbourne at the Melbourne Regional Landfill (MRL) facility, which the Company has operated since 2015. While competition remains strongest in Victoria, this is expected to ease through FY26 with the alternative landfill reaching the end of its useful life
Management is aiming transitioning away from longer-term municipal waste contracts (~10 years) and increasingly focusing on commercial and industrial (C&I) waste. While C&I contracts are typically shorter (~3-5 years), they are higher margin. So, while increased competition is contributing to margin decline (and poses a risk to EBIT in FY26), so too are higher costs/inefficiencies associated with the current customer mix.
Efficiency Gains
CWY has one of the largest heavy vehicle fleets in Australia and is looking to reduce total ownership costs. These include fuel, repair and maintenance of its heavy vehicle fleet via 3rd party operators. The Fleet transformation program and optimisation is expected to result in more efficient fleet ownership as well as reduction in CAPEX required due to lower vehicle purchases.
It is likely that the Company will maintain ownership of its regularly used ‘Cleanaway’ owned-and-branded fleet, such as municipal rubbish collection vehicles. In addition, further efficiency can be gained by outsourcing heavy vehicles for niche/specialised operations. These specialised vehicles are costly and the ongoing ownership cost is high due to lower utilisation levels.
Cost Performance Needs to Improve
CWY’s cost performance remains mixed. On the one hand, fleet repairs/maintenance costs are increasing. On the other hand, labour efficiency is improving. The level of vacancies fallen to a more manageable level (below long-term average of 300-400). However, the voluntary employee churn in the first year remains high at 35%. This impacts productivity as more experienced drivers can collect bins faster with less accidents. It also impacts the Company’s ability to manage overtime.
Fundamental View
CWY shares are trading on a 1-year forward P/E multiple of ~28x, which places the multiple below the middle of the trading range over the last three years. This multiple is not overly demanding in the context of an EPS growth profile of +20% over FY24-27 on a CAGR basis. However, a key overhang for the share is that the market is not yet prepared to factor in EBIT upgrades to reflect the Company’s aim of achieving $500m EBIT in FY26.
Furthermore, EBIT growth is not fully translating into EPS growth given rising interest costs from higher cash rates and the use of debt to fund growth initiatives (i.e. CAPEX and Merger & Acquisitions).
Charting View
CWY had been in an uptrend for the past year but then the range started to tighten up in August. The last few days has seen it break to the downside and now the uptrend appears to be at risk. The next major support level is near $2.70 so it remains to be seen whether it can hold on at that level and present itself as a buying opportunity.
Michael Gable is managing director of Fairmont Equities.
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