The waste industry in Australia is going through meaningful positive structural changes. This is due to the federal government’s National Waste Policy Action Plan, which has been supported by recently-announced funding. We examine the extent to which Bingo Industries (ASX:BIN) can capitalise on this favourable industry backdrop and whether we have a buying opportunity here.
About Bingo Industries
Bingo Industries is a vertically-integrated waste management and recycling company. The Company’s operating segments include Collections, Post-Collections and Other. The Collections segment collects and transports waste from customers to post-collections facilities. This is across both the Building & Demolition (B&D) and Commercial & Industrial (C&I) markets.
The Post Collections segment consists of a network of fully-integrated transfer stations, resource recovery and recycling centres, as well as disposal assets located in NSW and VIC. The Company seeks to divert waste from landfill, by sorting and processing both B&D and C&I waste, to be reused, recycled or sent to other facilities. The Bingo’s acquisition of Dial-a-Dump Industries in FY19 has increased revenue contribution from Post Collection activities from ~50% to ~75% of group EBITDA.
Key Fundamental Drivers
Recovery in Margin Could Take Longer Than Expected
A key highlight from the FY20 result was that group underlying EBITDA margin expanded from 26.9% in FY19 to 31.3% in FY20 .The better-than-expected margin performance reflecting strong cost control to overcome the sudden market slowdown as a result of COVID-19.
BIN expects group EBITDA margin to decline in FY21 by ~200-300 basis points, as the Company is targeting growth in overall volume and market share. The latter is likely to be achieved at the expense of price and margin. This is given that addressable market volumes are expected to fall by ~6% in FY21. Another factor that is likely to pressure margins is that the Company is aiming to maintain Post Collections market share and volumes ahead of the ramp-up of the new Material Processing Centre (MPC2) in the latter stages of 2H21. MPC2 is located in within the Company’s Recycling Ecology Park in Western Sydney.
BIN expect EBITDA margin to rebound to its longer-term target of 30%. The Company commented that FY22 and beyond has potential to offer significant upside to margins. Regulatory and market tailwinds increase the addressable market size and the ability to better utilise network capacity.
We are not entirely convinced that margin will recover from FY22, as per the Company’s expectations. On the one hand, EBITDA margin declines are likely to be temporary, given that lower pricing (which accounts for the majority of the expected margin decline) is unlikely to be sustained beyond FY21 given that there is limited new capacity being approved.
However, the key risk is that the magnitude of the margin decline is greater than expected given that that excessive price competition (which has ramped up in the Post Collections segment) is likely to continue until there is a recovery in building construction and general economic activity.
Outlook for End Markets Mostly Subdued
At present, Bingo Industries has revenue exposure to three end markets – Infrastructure: 40%, Non-Residential: 40% and Residential: 20%.
The Company has indicated that the pipeline for C&I work is expected to be impacted by COVID-19. This is particularly in B&D as a result of a softer residential market. BIN is also seeing subdued market conditions across non-residential construction. Non-residential activity is forecast to fall ~20% in FY21 while ~15% drop is expected in residential activity.
In response to these challenges, the Company has aggressively transitioned the business mix, targeting social and civil infrastructure to fill the residential gap, while bidding more aggressively on price to secure volumes. BIN expects 50% of FY21 revenue from infrastructure, 35% from non-residential volumes and 15% from residential volumes.
We consider that BIN could be well positioned to benefit from an uplift in infrastructure investment as part of a longer-term economic stimulus. In particular, infrastructure construction activity is forecast to peak from FY23-25 with the NSW and VIC state governments (BIN’s biggest exposure geographically) committing to ~A$125b of infrastructure projects over the next four years.
Gearing at Upper End of Target Range
Gearing (on a net debt to EBITDA basis) was 2.0x as at 30 June 2020. While at the upper end of the target range of 1.5x-2.0x, gearing was better than expected as a result of stronger cash conversion (at 109.8% of EBITDA on an underlying basis).
Nonetheless, the elevated gearing level remains a concern, especially given that weak cash conversion in the 1st half of the financial year not only points to lesser-quality earnings, but raises the prospect of a potential equity raising. This is especially in the event that gearing pushes higher towards the covenant level of 3.0x.
At current levels, the shares are trading on a 1-year forward P/E multiple of ~35x. This factors in a strong recovery in earnings in FY22, as volumes improve post-COVID-19 and operating efficiencies flow through following the completion of MPC2. However, over the shorter-term, the Company has some challenges. These are:
i. There is a risk that the magnitude of the margin decline is greater than expected.
ii. Notwithstanding the greater skew towards infrastructure, BIN still has a meaningful exposure to the multi-residential and commercial building space. These face a more challenging outlook than infrastructure. In the event that the recovery in overall volume is weaker than expected (in particular from the Stage 4 lockdown in Victoria), we consider that BIN – unlike its ASX-listed competitor Cleanaway Waste Management (ASX:CWY) – would not have the same capacity to use cost as a lever to offset the impact to earnings.
Leading into their recent results, BIN’s share price had fallen back and was retesting the March lows. It then jumped higher on the day of their result, trading on high volume. That set-up should have seen it rally further but it doesn’t seem to be kicking on yet. However, it has come back to find support here at the gap near $2.20. If it is now launching higher from here, then we have a signal that it should rally.
Michael Gable is managing director of Fairmont Equities.
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