Results overview (vs consensus):
Underlying EBITDA $668m vs $668m
Underlying net profit $147m
FY23 dividend 4.9cps in-line
Capex $386m, net debt/EBITDA 2.3x
FY23 result. In-line with consensus at the EBIT line, but higher interest cost weighed on net profit to be just 2% ahead of last year. The company took an impairment charge of $74.3m against its New Chum landfill site in Queensland which lost an appeal to extend its air space (upon which landfill depreciation is based).
Solid Waste Services EBIT $278m +22% was boosted by two acquisitions during the year (SRN and GRL) and benefitted from its landfill gas capture efforts.
Liquid Waste & Health Services EBIT fell 7.9% to $49m due to higher costs particularly in Health Services.
Industrial & Waste Services EBIT $26.5m +33% on much stronger activity and some contract wins.
Following the $400m equity raise in 2022, CWY’s balance sheet ended the year with leverage at 1.89x net debt to EBITDA with net debt just over $1.5bn.
Outlook. The Annual Meeting on 20 October will contain a trading update. The current growth capex guidance is for approximately $150m pa in FY24-26 (FY23 growth capex $155m).
The company has set an ambition for EBIT to exceed $450m by FY26. This is partly driven by the growth capex parameters. As the business continues to recover under its Blueprint 2030 program, it is also expanding as the industry grows. This fundamentally drives a higher level of capex (and depreciation and amortisation). CWY has put more emphasis on achieving a better return on investment (12% post-tax) for its growth capex which should please investors.
CWY said about one third of its EBIT baseline in FY23 is attributable to a recovering operational performance, another third from identified growth opportunities and the final third from ‘operational excellence’ gains. The $450m EBIT ambition is therefore a minimum it expects to achieve, and this is reflected in management incentives only attaining 50% of target at this level.
Investment View
CWY has a leading position in the waste management industry which is undergoing a multi-year transition away from landfill towards greater recycling and more innovative processes such as converting waste into energy.
There is room for improvement/recovery in CWY’s existing business as well as plenty of opportunity to capitalise on new opportunities, but this comes at a cost. The ambition pathway to achieving at least $450m EBIT pa requires significant investment that shareholders (and the Board) expect a commensurate return. Encouragingly, a ROIC factor has been added to management long term incentives for this very reason.
CWY’s strategy is mostly focused on its existing assets which will attract the growth capital through to FY26 and beyond. But as we observed in 2022, CWY will consider acquisitions for the right reasons and price.
The macro environment is clearly positive for CWY to benefit, but the challenge is in the competitive nature of the industry and the internal execution of managing its resources, particularly labour.
In our view, there is evidence of progress but with plenty of upside to go.
Risks to Investment View
Regulatory requirements in the waste management industry are many, including waste levies, carbon tax, environmental regulation and planning regulations. Changes in these factors could affect CWY’s ability to operate. This is an assets-heavy industry so operational risks are abundant including the risk of site loss, environmental factors, industrial disputes and technology risks. Competitive threats are possible. The company has a high exposure to health and safety risks. Financial and cybersecurity risks are also apparent.
Recommendation
We have retained our Buy recommendation.
