PICK OF THE MONTH
The waste management sector should, on paper, offer investors dependable returns. As the old saying goes: “There’s always money in muck.” Much like the undertaking profession, there’s never any shortage of business — waste continues to be generated in droves, both industrially and domestically.
However, there are complications in maintaining costeffective solutions. The fact that the general public is increasingly environmentally aware does mean an adherence to certain “green” standards — and it’s not unusual, these days, for waste management firms to come under fire in the media.
There’s not much history for waste management firms on the JSE, with few listings in three decades. These include Fraser Alexander (with part exposure to the sector) and, more recently, EnviroServ.
Though it would be a stretch to discern a pattern, the EnviroServ example — for investors with long memories — might contain pointers for Interwaste, the JSE’s sole waste management listing.
EnviroServ endured a fairly torrid time on the JSE, with investors seemingly oblivious to the counter’s fundamentals. But in 2008 it was bought out by an Absa Capital-aligned entity at a premium price of R16.60 a share.
In the three years preceding the buyout — when earnings were increasing — investors could have snapped up EnviroServ shares at between 220c and 500c. In the year of the buyout, when the company posted earnings of more than 100c a share, punters could accumulate shares at between 900c and R11.
Interwaste, which came to the market in 2007, has traded in a fairly narrow band over the past few years. The price extremes range from a 70c low to a 125c high.
More recently, the share has dipped under 100c, and at the time of writing it was trading at 89c. This is below the last stated tangible NAV of 118c a share — noteworthy for what is essentially a services company.
IM is not suggesting that the depressed trading levels will prompt a tilt by a competitor, private equity player or opportunistic investor, or even a management buyout — though this is quite possible.
At this juncture Interwaste — which paid a maiden dividend for the financial year to end-December — looks like a decent business trading at dirtcheap levels.
Recent interim numbers were not easy to rubbish. Headline earnings came in 41% higher at 6.43c a share, putting the firm on a forward earnings multiple of about seven.
Earnings were reassuringly backed by strong sustainable cash generation. Cash generated before financing was R78m — equivalent to 18c a share.
If there is a weak spot, it is that sprightly revenue growth of 24% to R595m was diluted at operating profit level, which was up 22% at about R60m.
IM calculates the gross margin at about 49% — down on the previous interim peri- od’s 54% and the full 2017 financial year’s 52%. This suggests the waste management market remains tricky.
Interwaste’s revenue growth was driven by industry price increases and efforts to diversify its customer base. But this top-line gain was offset by lower recyclable prices and lower volumes to landfill facilities.
Gross profit percentages remained under pressure due to lower domestic recyclable prices, higher input costs and lower disposal volumes at Interwaste’s FG landfill site, which incurred increasing year-on-year environmental compliance costs.
But there is encouragement to be taken from the reduction in gearing to 19% from a much tighter 41% last year. Net debt now stands at a more manageable R112 (previously R230m).
The company also prudently bought back 11.6 million shares at an average 84c a share.
Interwaste cautioned that China’s ban on importing certain waste and slag-type material — and the effect on local recyclable prices — will continue to affect margins negatively.
But executives seem confident that Interwaste’s ability to offer integrated waste solutions — as well as higher levels of environmental compliance — should help to retain clients and snag new business.
IM thinks it could be a good time for long-term investors to collect a few Interwaste shares at prices from 85c-95c. Investors with an inclination for yields should also note that the firm is applying a reasonably conservative dividend policy of 4.5-5 times earnings cover.
As gearing is further eased and a sustainable profit profile established, this cover could come down markedly.
Executives seem confident that Interwaste’s ability to offer integrated waste solutions should help to retain clients