For once, more waste would be good news

Nowadays the AltX is a somewhat forgotten exchange. Even so, it can still point to successes such as Esorfranki and Taste Holdings which moved onto the main board.

One of these less well known movers is waste management group Interwaste. It was founded in 1989 by Alan and Bronwyn Wilcocks and listed on the AltX in 2007. It then moved onto the main board in 2014 and has grown into a sizeable operation.

But despite its progress, it has not had an easy time lately. For one, it expected revenue for the year to end December 2015 to reach R1bn for the first time. Though revenue was up 14.7% to R957m, it “produced a disappointing result for the year”.

Earnings before interest, tax, depreciation and amortisation were up 21.4% to R180.7m but overall profit for the year was down 7.3% to R42m.

The group’s earnings were down largely as a result of lower commodity and oil prices knocking its effluent treatment operations. The lower prices led its customers in the oil and commodities industries to defer spending on clean-ups and reduce discretionary spending.

This meant profits at its waste management division — which houses its effluent treatment operations — fell from R46m to R35m despite revenue rising 12.4% to R760.3m.

It was not all bad news. Its compost manufacturing and sales business grew revenue 12.5% and turned a R1.2m loss into a R5.3m profit.

Interwaste expects this division to continue its improvement. The retail side of this business has “achieved critical mass” and it secured a broader source of raw material, enabling it to maintain its operations at a profitable level.

This operation is now the largest producer of organic growing material in Southern Africa. It has diverted 300 tons of organic material — mostly discarded bark from the timber industry — annually from its landfill site.

This material, along with the domestic greens it collects from its landfill sites and garden waste transfer stations, has produced 100,000 m3 year of “export-grade compost and growing material” at its Mpumalanga centre.

Besides its compost operation, its landfill management business also did relatively well. Revenue was up 28.4% to R150.4m and profit rose 13.5% to R44.4m.

The group said a new business model it had introduced over the past two years of getting rid of unprofitable contracts and focusing on getting larger ones was starting to pay off.

The prospects for its landfill operations are improving as it won a large tender to construct and manage a municipal landfill site. “The project has met all of its milestones to date, and both parties have benefited from the process,” it said in its latest annual report.

It also completed construction of its own landfill in Clayville, Gauteng — which it manages for its own account — and has received a licence to operate its Klinkerstene landfill near Delmas.

Besides running its traditional waste management operations, Interwaste has branched out into refuse-derived fuel. It uses solid waste material as an alternative fuel for power generation.

It also runs an anaerobic digestion plant, which is a facility that uses micro-organisms to break down biodegradable material such as sewage sludge. This process creates methane which can be sold as fuel.

Despite its disappointing numbers, Interwaste looks like a solid performer. It points out that despite its latest results it has grown revenue by 71.3% and operating profit by 163.3% over the past three years.

But if investors like the group, they should note that it has a high debt to capital ratio of 0.85. Even so, the argument can be made that as Interwaste acts like a utility and has long-term contracts, it will have a steady supply of cash to pay off its debts.

It is also sensitive to changes in the economy. The better the economy, the more waste there is, the better it does.

But the economy is not performing well, which means it will have to play a clever game to grow earnings.