PICK OF THE MONTH

Financial Mail - Investors Monthly - - Contents -

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

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