Cleanaway increases organic footprint, but not everyone is convinced

By Market Index
Thu 01 Sep 22, 11:58am (AEDT)
waste bins
Source: Unsplash

Key Points

  • Cleanaway has finalised the acquisition of Global Renewables Holdings (GRL) for $168.5m
  • Management expects GRL to contribute 5.2% to its earnings per share (EPS) on an FY22 basis
  • Credit Suisse suspects the GRL acquisition has more to do with simply tidying a messy and onerous contract that was acquired with Suez Sydney

Cleanaway Waste Management (ASX: CWY) told the market this morning that the acquisition of Global Renewables Holdings (GRL) for $168.5m, which was finalised today, will allow the S&P/ASX100 company to capitalise on the growing council FOGO (Food Organics, Garden Organics) market.

However, Credit Suisse, which has an Underperform rating on the stock, suspects the GRL acquisition has more to do with simply tidying a messy and onerous contract that was acquired with Suez Sydney, but we will get to that later.

While Credit Suisse can clearly see merit in the business strategy, the broker wants to see greater evidence of this newly acquired asset producing results before ascribing a higher valuation multiple.

GRL is expected to contribute to Cleanaway’s earnings from 1 September.

Accelerating the BluePrint 2030 strategy

Recently appointed CEO Mark Schubert expects GRL - which is a post-collections compositing facility, processing around 20% of Sydney’s red bin household waste - to accelerate its BluePrint 2030 strategy and its organics blueprint.

It’s understood that GRL’s licensed composting facility delivers around 30% of landfill diversion and “better carbon outcomes” compared to landfill.

“The site and facility provide a strategic location and infrastructure to enhance our broader network and customer offering today and into the future as we position ourselves to capture share of the growing FOGO market opportunity,” Schubert advised investors this morning.

Cleanaway is the exclusive contracted provider of waste to the GRL facility until 2032 and is expected to inject up to $45m enhancing the facility over time.

Cleanaway also expects the deal to help leverage its geographically expansive network to capture organics share, with GRL including a further planned Lucas Heights facility providing Sydney-wide processing capability.

Financial upside

Management expects GRL to contribute 5.2% to its earnings per share (EPS) on an FY22 basis based on the placement proceeds used to fund the purchase price and transaction costs associated with the acquisition.

Cleanaway said this provides the business with an opportunity to immediately internalise existing volumes and acquire “attractive” pro forma FY22 earnings before interest, tax, depreciation and amortisation (EBITDA) of approximately $21.4m.

As alluded to by Credit Suisse above, the acquisition does away with an unfavourable contract provision for Cleanaway in relation to GRL where payments to GRL exceeded receipts from councils.

It should be noted that this contract was acquired as part of the Suez acquisition.

Capital raise to fund BluePrint 2030

Cleanaway entered a trading halt 19 August before announcing a $350m capital raising.

The offer price of $2.50, was a 7.7% discount to the closing price of $2.71 per share.

What’s left over after the $168.5m GRL acquisition will been earmarked to enhance the balance sheet capacity to fund Cleanaway’s BluePrint 2030 strategy.

Management notes the acquisition of GRL accelerates Cleanaway’s BluePrint 2030 organics strategy by providing high circularity, low-carbon solutions for ‘Red bin’ mixed waste today and future FOGO bin waste.

“We are also well advanced on a number of strategic infrastructure development initiatives and tender opportunities aligned to BluePrint 2030,” Schubert noted.

Cleanaway share price snapshot.


What other brokers think

Cleanaway’s share price is up 5% over one year but has jumped 10% since trading at a year-to-date low of $2.51 on 24 June.


Consensus on Cleanaway is Moderate Buy.


Goldman Sachs is Neutral rated on Cleanaway with a price target of $2.47 and notes key risks including a less constructive regulatory backdrop, weakness in the Australian domestic economy and greater/lack of M&A.


Based on the seven brokers that cover Cleanaway (as reported on by FN Arena) the stock is currently trading with 3.7% upside the target price of $2.87.


Citi believes rising costs undermined a strong FY22 revenue performance and is forecasting FY23 earnings of $662m (inclusive of the GRL acquisition), around the midpoint of management's guidance range of $630-670m.


The broker’s Neutral rating is unchanged and the target price falls to $2.84 from $3.19.


Morgans expects meaningful downgrades to FY23 forecasts in reaction to FY23 guidance.


The Hold rating is retained and the target falls to $2.69 from $2.79.


After FY22 margins declined - due to labour shortages and lagged cost inflation pass through - Ord Minnett expects improvements in FY23 and FY24 as operating conditions normalise.


The broker’s Buy rating is maintained, while the target slips to $3.10 from $3.20.

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