It is clear about Cleanaway’s growth into materials recovery which features more favorable economics than waste collection. Under its “Footprint 2025” capital allocation strategy, the group will continue to focus investment in materials recovery and waste-to-energy, or WTE.
Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in Greenfield materials recovery, waste treatment, and WTE projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream.
Further diversifying Cleanaway away from waste collection is the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.
Financial Strength
Cleanaway has made further progress on its proposed AUD 501 million acquisition of key Australian post-collection assets from Suez, securing new debt facilities which will allow the deal to be fully debt funded. Therefore, balance sheet flexibility post deal completion exists should further acquisition opportunities arise. Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021-24 period, Cleanaway’s sources of cash—those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or Greenfield–under Cleanaway’s Footprint 2025 strategy.
Bull Says
- Cleanaway is benefiting from industry consolidation.
- Municipal waste contracts provide relatively stable cash flows through the economic cycle.
- Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.
Company Profile
Cleanaway Waste Management (ASX: CWY) is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment and valorization, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I, waste stream segments and in nonhazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- BHP is trading at fair market value but with an attractive dividend yield, according to our blended valuation (consisting of DCF, PE multiple, and EV/EBITDA multiple).
- Commodity prices, particularly iron ore prices, have fallen as a result of lower Chinese demand.
- In the absence of growth opportunities, focus on returning excess free cash flow to shareholders (hence the solid dividend yield).
- Quality assets with a low cost structure and a dominant market position.
- China’s growth rate outperforms market expectations.
- In the medium to long term, management favours oil and copper.
- A strong balance sheet position.
- Continued emphasis on productivity gains.
Key Risks
We see the following key risks to our investment thesis:
- Poor implementation of corporate strategy.
- If the coronavirus is not contained, it will have a long-term impact on demand.
- Global macroeconomic conditions have deteriorated.
- The global iron ore/oil supply and demand equation has deteriorated.
- Price declines in commodities.
- Production halt or unplanned site shutdown
- AUD/USD fluctuation
Investment in the Jansen Stage 1 potash project:-
BHP has approved US$5.7 billion in capital expenditures for the Jansen Stage. 1. Potash exposure, according to management, provides increased leverage to key global megatrends such as growing population, alternative chosen, emissions reductions, and improved environmental stewardship. BHP expects Jansen S1 to generate 4.35 million tonnes of potash per year, with first ore expected in CY27 (construction to take six years, followed by a two-year ramp up). “At consensus prices, the go-forward investment in Jansen S1 is anticipated to produce an internal rate of return of 12 to 14 percent, a payback period of seven years from first production, and an underlying EBITDA margin of 70 percent,” management stated. Surprisingly, BHP evaluated the carrying value of its current potash asset base and recognised a pre-tax impairment charge of US$1.3 billion (or US$2.1 billion).
Company Description
BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- Engineering and Support The business sale process is currently underway, removing one downside risk to the stock.
- The business sale process is currently underway, removing one downside risk to the stock. However, as development progresses through FY23, gearing is expected to rise to 20%.
- Robust development outlook, with demand for both commercial and residential, particularly with a high level of apartment pre-sales;
- The outlook for new infrastructure projects to be tendered in Australia over the next two years remains favourable.
- A new management team will almost certainly bring a new perspective and strategy.
- In a difficult trading environment, the proposed cost out programme of $160 million should be supported by earnings.
- Valuation appears to be undemanding.
Key Risks
Our investment thesis is vulnerable to the following key risks:
- Additional provisions for existing problem projects.
- New projects are overpriced in terms of risk.
- Dividends should be reduced.
- Interest rates have risen unexpectedly.
- The number of apartments that have gone into default has increased.
- Any delays or execution issues in development and construction that affect margin.
- Any net outflows from the company’s investment management division.
What sparked our interest
- LLC will hold a Strategy Update on August 30th, but management has already announced some details, including $160 million in cost out, which equates to 17.4 percent of FY21 earnings.
- A difficult FY22 is ahead, with the outlook shocking the market.
- LLC will now book profits on development projects as they are delivered (rather than upfront), shifting the profit profile to the back end.
- LLC is still aiming for $8 billion in development output by FY24, with a ROIC of 10-13 percent. LLC will see a significant increase in earnings if timing targets are met and macroeconomic conditions remain “normal.”
Company Description
Lend Lease Corporation (LLC) is a global property developer with three key segments in (1) Development: involves development of communities, inner city mixed use developments, apartments, retirement, retail, commercial assets and social infrastructure (with earnings derived from development margins, development management fees received from external co-investors and origination fees for infrastructure PPPs) (2) Construction: involves project management, design, and construction service, predominately in infrastructure, defence, mixed use, commercial and residential sectors (with earnings derived from project and construction management fees and construction margin); and (3) Investments: involves wholesale investment management platform, LLC’s interests in property and infrastructure co-investments, Retirement and US military housing (with earnings derived from funds management fees as well as capital growth and yield from co-investments and returns from LLC’s retirement portfolio and US military housing business). LLC operates predominately in Australia, but also in the UK and US and with a smaller contribution to earnings derived from the Asia Pacific.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Philosophy of the Fund
The Fund’s investment philosophy is based on identifying long-term fundamental value picks that are both listed and unlisted. RARE believes that significant opportunities emerge during economic cycles as markets misprice infrastructure assets in the short term. In the RARE Emerging Markets Strategy, an accumulation index comprised of the FTSE EM Gov Bond Index USD plus 5.0 percent per year is used as a benchmark.
Investment Procedure
The investment team conducts fundamental analysis and valuation in order to identify ‘pure infrastructure’ assets with monopolistic characteristics, long contractual duration, and relatively stable cash flows. In particular, the investments must meet three key requirements:
- The asset must be a hard-physical asset;
- The asset must provide a valuable service to society; and
- The asset should have strong foundations in place to ensure equity holders are adequately rewarded.
With these characteristics in mind, RARE uses the ‘RARE EM 150’ as the proprietary investment universe for their Emerging Market Strategy. Included in this list are companies in the MSCI Emerging Markets or Frontier Emerging Markets Index, as well as companies that are listed in other markets but produce a majority of their operating earnings from activities related to emerging markets. Of the 150 securities, 40% of these companies are considered Core and consistently covered, while the remaining 60% are watch listed and updated at least once a year. On a quarterly basis, the composition of the ‘RARE EM 150’ is reviewed by the Investment Leadership Team.
Sector exposure limits are also placed, with a clear preference towards regulated utilities and transport. The Fund notes this is due to their relatively stable performance, and typically lower risk nature in comparison to user-pay assets.
Source: RARE Infrastructure
Fund Positioning
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
the wake of an acquisition strategy that left it with operating inefficiencies and a debt-heavy balance sheet. Led by initiatives endorsed by its largest shareholder, Glenview Capital Management (15% stake as of March), Tenet has replaced top leadership, refreshed the board, improved governance practices, pruned its portfolio of assets, and undergone a restructuring effort.
Operationally, Tenet has focused on flattening layers of management, improving operating efficiencies both inside and outside its healthcare facilities, and increasing focus on service quality. All these factors appear to be positively influencing returns on invested capital at Tenet, which began exceeding its weighted average cost of capital in 2017 by our calculations for the first time since the Vanguard Group acquisition in 2013.
Despite all of these positives, the company still operates with substantial debt on its balance sheet and is currently rated in the broad single B category by the major credit rating agencies on an unsecured basis.
Financial Strength
It is expected Tenet to at least meet its net leverage goal of 5.0 times by the end of 2021, which would be a positive development in the odyssey that has been Tenet’s credit story since the Vanguard acquisition in 2013. At the end of June, the firm held $2.2 billion in cash, which included aid from the government and new borrowings. While Tenet will need to pay back Medicare advances and payroll tax deferrals, it looks to be in good shape to do so, even after paying $1.1 billion for the recent acquisition of the SCD ambulatory surgery center assets in late 2020. Tenet recently agreed to sell five Miami-area hospitals for $1.1 billion. The company also aims to spin off its revenue cycle management business, Conifer, in the near future, which could be a source of funds to meet its debt obligations as well.
Bull Says
- With a new management team in place since late 2017, Tenet has become a more efficient and more profitable organization, suggesting that the team is making progress operationally.
- As the top provider of ambulatory care services in the U.S., Tenet should be able to continue benefiting from the ongoing shift of procedures to outpatient facilities from acute-care hospitals, which could boost growth and margins.
- Tenet continues to focus on improving its balance sheet and could meet its deleveraging goal on a sustainable basis in 2021.
Company Profile
Tenet Healthcare Corporation (NYSE: THC) is a Dallas-based healthcare provider organization operating a collection of hospitals (65 at the end of 2020) and over 550 outpatient facilities, including ambulatory surgery centers, urgent care centers, freestanding imaging centers, freestanding emergency rooms/micro-hospitals, and physician practices across the United States. Tenet enjoys the number-one ambulatory surgical center position nationwide, as well.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
