Business Strategy & Outlook
Cleanaway’s strategy is positive, which seeks to maintain its leading position in commercial and industrial, or C&I, and municipal waste collections and to continue to improve its moat profile by investing in midstream materials recovery assets and, where possible, in downstream disposal assets. Cleanaway’s is the leading player in C&I and municipal waste with around 140,000 C&I customers and some 90 municipal council waste collection contracts. The economics of the waste management industry are overwhelmingly local in nature. Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance. This local market dominance in turn delivers route density that better spreads fixed costs—an imperative for-profit generation in waste collection. Cleanaway is a relative latecomer to disposal, biological treatment, and midstream materials recovery with global players waste management competitors Veolia and Suez possessing high-quality disposal assets Cleanaway cannot replicate. An exit from the Australian market by either player would be the only route to materially increasing disposal earnings.
As such, the sale of the Lucas Heights Landfill by Suez to Cleanaway–the result of the Veolia-Suez merger–is a rare windfall. Cleanaway’s growth into materials recovery is optimistic which feature more favourable economics than waste collection. Under its “Blueprint 2030” capital allocation strategy, the group will continue to focus investment in materials recovery and energy from waste, or EfW. Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW 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 collections, 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 Strengths
Cleanaway debt-funded its acquisition of key Australian post-collection assets from Suez. Leverage–defined as net debt/EBITDA excluding IFRS-16 lease liabilities–sits at 2.78 times at the end of fiscal 2022, up from 1.0 times at fiscal 2021 year-end. Nonetheless, significant headroom to Cleanaway’s leverage covenant on existing debt facilities–calibrated at 3.0 times–exists. Therefore, balance sheet flexibility exists should further acquisition opportunities arise. Cleanaway’s balance sheet amid COVID-19 induced turbulence is comfortable. Specifically, 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–fiscal 2024 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 over said period. 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 Blueprint 2030 strategy. Return of capital to shareholders could be considered in the absence of suitable mid- or downstream waste asset investment opportunities.
Bulls Say
- 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 Description
Cleanaway Waste Management is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment, and valorisation, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I,
waste stream segments and in non-hazardous 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)
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