In mid-December, Cleanaway Waste Management (ASX:CWY) announced the acquisition of Toxfree Solutions (ASX: TOX). The acquisition is expected to be completed in the June 2018 quarter and remains subject to approval from TOX shareholders and the ACCC.
Cleanaway Waste Management (CWY) has the largest fleet of collections vehicles. They operate from over 100 depots across Australia and is the largest collection of municipal council waste, servicing 90+ municipal councils. The largest part of the business is the collection of commercial and industrial, municipal and residential collection services for all types of solid waste streams. Other business streams include the ownership and management of waste transfer stations and landfills. Alongside this is the collection, treatment, processing, refining and recycling of liquid and hazardous waste.
Results for FY17 were broadly in line with consensus estimates. It was once again driven by impressive cost efficiency, which contributed to further margin gains. The Company has provided guidance for EBITDA in FY18 to be in line with consensus estimates, which indicates EBITDA growth of 5-6%. While this guidance is considered conservative (i.e. below the 7.1% reported for FY17), earnings are expected to accelerate further into FY19. This is as a number of recent meaningful contract wins in the Solids division begin to contribute a full year’s benefit.
Cleanaway Waste Management purchase of TOX
The recent acquisition of TOX is likely to now likely to provide the following benefits:
- Significantly EPS accretive: CWY expects the acquisition of TOX is expected to be accretive to EPS by over 25%.
- Complimentary to Existing Business: The acquisition of TOX is a natural fit within the existing CWY business with significant operating overlap. The transaction increases CWY’s competitive position in key markets. It also diversifies the earnings base and provides exposure to TOX’s high growth health business.
- Balance Sheet Retains Scope for Further Acquisitions: Gearing (on a net debt to EBITDA basis) has remained at ~1.1x since 30 June 2016 and well below ~2x, a level which the Company has previously indicated would be a ‘comfortable’ gearing level. Following the acquisition of TOX, gearing rises to 1.6x. They have indicated that there is still substantial headroom remaining for the Company to undertake further acquisitions. To this end, CWY has previously indicated that it had identified a number of additional small to medium sized acquisitions for FY18.
In our last review on CWY on 31 October 2017, we considered that the market had factored in additional earnings upside from further contract wins and more bolt-on acquisitions. The stock’s P/E has only marginally re-rated, from ~27x at the time of our last review, to ~28x at the time of writing. Despite that, it indicates that while there are significant scale and earnings benefits from the acquisition of TOX, the market would prefer to see evidence of execution before the rerating the stock higher.
The chart for Cleanaway Waste Management
The shares have been in an uptrend for a couple of years now .We can see on this chart that they have been nicely forming a series of higher highs and higher lows. Since the announcement of the TOX acquisition, the shares have spiked up. However they seem to be displaying price rejection at levels above $1.60. This is evidence that the market is doing what we mentioned earlier, that it does not want to rerate the stock higher just yet. As such, the shares are likely to drift back into trend line support in the mid $1.40’s.
Michael Gable is managing director of Fairmont Equities.
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