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.
The recent acquisition of TOX is likely to now likely to provide the following benefits:
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 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.
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Michael Gable is managing director of Fairmont Equities.
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