For once, more waste would be good news

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

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.

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