We recently researched Cleanaway Waste Management (ASX:CWY) in The Dynamic Investor. Several factors have stalled any meaningful re-rating in the shares, particularly over the last 12 months. These include increased competition, significant capital requirements and margin decline. With the shares at the bottom end of the recent trading range, we consider whether valuation appeal is starting to emerge. Or is the risk-reward unfavourable?

About Cleanaway Waste Management

Cleanaway Waste Management is an Australian-focused industrial, waste and environmental services company. It reports results across three segments: Solid Waste Services, Liquid Waste & Health Services, and Industrial & Waste Services.

CWY’s revenue base is largely underpinned by long-term contracts across all sectors and a geographically diverse customer base. The customer base includes municipal councils, hospitals, infrastructure, resources, commercial and industrial customers.

Key Fundamental Drivers

Sound Strategy Underpinning Recent Acquisition

On 20 March 2025, CWY announced the acquisition of Contract Resources for $377m. The acquisition will be fully debt funded and completion is targeted by late 2025 subject to ACCC approval and other customary conditions.

Contract Resources is market leader, specialising in catalyst handling, decontamination and chemical cleaning. The strategic rationale for the acquisition is underpinned by two main factors: i) The expansion of the addressable market for decommissioning, decontamination, and remediation, and ii) Contract Resources’ market leadership. These factors make the deal low-risk and high single-digit EPS accretive.

The acquisition expands Cleanaway’s service capability into highly valued, production-critical, higher-margin, technical services. When combined with the Cleanaway’s IWS segment, the acquisition creates a leading technical services provider to the oil & gas, resources and industrial customers.

Contract Resources has a strong track record of EBIT growth delivery, having reported EBIT growth of +21% over FY22–FY25f on a CAGR basis. The average EBIT margin over the same period is 10%. The recent uplift in EBIT margins attributed to a broadening of scope with existing customers (increased share of wallet). Given the high fixed cost nature of operations, this has led to strong incremental EBIT.

In context, Contract Resources’ margins are less than that for CWY (EBITDA margin: 23.1%; EBIT margin: 11.6%). However, if an adjustment is made for differences in capital intensity (deduct non-growth CAPEX and lease payments from EBITDA) then Contract Resources’ margins are higher than CWY’s.

Operating Leverage Expected

Following operational disruptions from COVID in FY21 – FY22, CWY had demonstrated a clearer path for EBITDA margin recovery and improvement over FY23 and the start of FY24 (i.e. 1H24). Following a ramp-up in competition, productivity issues and higher costs for both waste disposal and landfill cover (soils), operating EBITDA margins declined -30 basis points in 2H24. Although demonstrating a modest improvement in 1H25 (EBITDA margin was flat), we outline two factors underpinning our expectation for EBITDA margin expansion over the medium term:

i. The Company noted that the pricing, alongside volume, was an integral part of the revenue mix for the Solid Waste Services segment in 1H25. The prospect for Landfill volumes to improve, alongside a stabilisation in metropolitan C&I volumes, are supportive of EBITDA margin for the Solid Waste Services segment through 2H25.

ii. The Company has noted that restoration activity on labour, particularly in the Solid Waste Services segment, has further to progress. This comes despite the 1H25 result materials suggesting that it would be complete in FY25. Better rostering, fewer overtime hours and improvements in labour availability should all provide scope for cost improvement over 2H25 and into FY26.

To balance the argument, there are risks to the Company achieving operating leverage over the medium term. Disclosed weakness in metropolitan C&I business lines is evidence that Out-of-Home Food consumption has waned over the past six months, lowering collection frequency and volumes. This makes it more challenging for CWY to drive the economics of route density and offset its fixed costs (fleet/labour). Secondly, it is uncertain how long competitive pressure in Post Collections (Landfill) operations will continue.

Higher Gearing Level is Manageable

Weaker operating cashflow resulted in gearing of 1.95x (on a net debt to EBITDA basis) as at 31 December 2024, up from 1.9x as at 30 June 2024. The current level of gearing remains at the lower end of the target gearing range of 2.0-2.5x and is well within its covenant limits of <3.0x.

Upon completion of the Contract Resources acquisition, gearing is expected to increase to ~2.5x (most likely for FY26). Importantly, this gearing level is considered manageable.

Fundamental View

CWY’s domestic earnings base offers a clear investment proposition in light of uncertainty on the global growth outlook – a defensive earnings base offering growth potential. We contend that valuation appeal is starting to emerge, with the shares currently trading on a 1-year forward P/E multiple of ~24x, which is below the bottom end of the recent trading range. The current multiple is also undemanding in the context of an EPS growth profile of +18% over FY24-27 on a CAGR basis. The prospects for a re-rating are underpinned by:

i. The potential for the existing operations to generate EBIT margin expansion over the medium term from efficiency initiatives and improved cost performance underpin.
ii. The acquisition of Contract Resources provides upside risk to margin and is likely to further underpin the earnings growth outlook beyond FY26 – thereby aiding in the Company to achieve EBIT of +$500m in FY27.

Charting View

The past few weeks has seen CWY trade under the long-term uptrend line. This means that it could be at risk of lower levels unless it can get back above that line. From a charting perspective, a safer entry point would be when CWY can get back above that line. That is, we would prefer to see a weekly close above $2.80 before entering the trade.

 

Michael Gable is managing director of Fairmont Equities.

 

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