Cleanaway Waste Management - Morgans

Environmental│Australia│Equity research│April 6, 2018

Cleanaway Waste Management High conviction

ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:

A$1.43 A$1.68 A$1.68 17.5% CWY.AX CWY AU US$2,235m A$2,908m US$9.66m A$12.31m 2,034m 100.0%

Average daily turnover: Current shares o/s Free float:

Price Close

Relative to S&P/ASX 200 (RHS)

1.700

135.0

1.600

128.3

1.500

121.7

1.400

115.0

1.300

108.3

1.200

101.7

1.100 60

95.0

Vol m

40

20 Apr-17

Jul-17

Oct-17

Jan-18

Source: Bloomberg

Price performance Absolute (%) Relative (%)

1M -2.7 -0.9

Nathan LEAD T (61) 7 3334 4548 E [email protected]

3M -5.9 -0.4

12M 23.3 24.8

■ We have included Cleanaway in the latest update to our High Conviction list. ■ The CEO’s recent presentation to the Morgans adviser network helped reinforce confidence in our positive outlook for the company.

■ Our 12 month target price remains unchanged at $1.68ps, indicating ~16% upside at current prices (plus dividend yield 0.5% contamination) would ultimately benefit CWY.

Forecasts, valuation, and key risks Forecast changes are immaterial. We expect relatively defensive and solid earnings growth, with ~7% EBITDA growth in FY18 and ~15% pa CAGR across FY19-22F. EPS growth is more difficult to forecast due to TOX acquisition accounting (we currently expect ~19% pa CAGR across FY19-22F). Our target price of $1.68ps is unchanged and is based on our December 2018 DCF valuation. The DCF lifts over time due to the increasing forecast free cashflows (ie. $1.91ps as at Dec-2020). Reverse engineering the DCF, the equity IRR at the current share price is >11% pa (undemanding terminal value of 8x EV/EBITDA applied to CY23F EBITDA). Key risks to our investment view include TOX acquisition-related risks (completion, integration, synergy achievement) and ongoing business risks (cost control, economic conditions, regulatory, competition, M&A, capital management, recycled commodity and energy price risk). Financial Summary Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x)

Jun-16A 1,455 280.0 44.8 0.040 38.2% 35.76 0.017 1.19% 9.18 68.8 17.5% 1.28 3.60%

Jun-17A 1,454 300.1 72.5 0.049 21.9% 29.33 0.021 1.47% 8.63 119.0 17.9% 1.25 4.31%

Jun-18F 1,566 322.2 51.9 0.053 8.4% 27.06 0.021 1.47% 10.24 NA 29.8% 1.20 4.51% 0.25% 1.02

Jun-19F 2,191 461.5 133.7 0.069 30.9% 20.67 0.034 2.38% 7.78 51.2 27.8% 1.16 5.71% 1.06% 1.02

Jun-20F 2,254 502.9 151.3 0.083 20.0% 17.22 0.042 2.94% 7.05 36.9 25.4% 1.13 6.64% 1.56% 1.06

SOURCE: MORGANS, COMPANY REPORTS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Figure 1: Financial summary Valuation Enterprise value (DCF) Net debt Equity value ($m) Shares on issue (million) Equity value per share ($) Profit and loss ($m) Solids Liquids & Industrial Services Corporate and eliminations Revenue - growth Solids Liquids & Industrial Services Corporate and Other Associates EBITDA - growth - margin D&A EBIT - growth Cash net interest expense Non cash interest expense Underlying tax Underlying NPAT - growth Material items post-tax NPAT Minorities SPS distribution NPAT to shareholders - growth EPS (normalised) (cps) - growth Dividends (cps) - growth - payout Cashflow statement ($m) EBITDA excl. associates Wcap, landfill remediation spend, one-offs Gross operating cashflow Net interest paid Tax paid Operating cashflow

Jun-15A 967 476 (58) 1,385 -26.7% 198 56 (24) 1 231 -80% 16.7% (134) 98 -91% (13) (15) (16) 54 -95% (69) (15) (1) (8) (24) -305% 2.9 -95% 1.5 52%

Jun-16A 1,090 437 (72) 1,455 5.1% 238 58 (15) 1 281 22% 19.3% (159) 123 26% (19) (15) (27) 62 14% (19) 43 2 45 -290%

Jun-17A 1,099 424 (69) 1,454 -0.0% 257 59 (16) 1 301 7% 20.7% (158) 143 17% (18) (15) (32) 78 26% (5) 73 73 62%

4.0 38% 1.7 13% 43%

4.9 22% 2.1 24% 43%

Jun-18 4,018 (727) 3,291 2,034 $1.62

Jun-19 4,229 (700) 3,529 2,034 $1.74

Jun-20 4,420 (658) 3,762 2,034 $1.85

Jun-21 4,565 (569) 3,996 2,034 $1.96

Jun-22 4,713 (476) 4,237 2,034 $2.08

Jun-18E 1,219 432 (85) 1,566 7.6% 280 61 (19) 1 323 7% 20.6% (165) 158 11% (7) (15) (40) 96 24% (44) 52 52 -28%

Jun-19E 1,507 796 (112) 2,191 39.9% 356 122 (16) 1 463 43% 21.1% (217) 245 55% (33) (14) (57) 141 47% (7) 134 134 157%

Jun-20E 1,540 830 (115) 2,254 2.9% 373 147 (17) 1 504 9% 22.4% (219) 285 16% (33) (14) (69) 169 20% (18) 151 151 13%

Jun-21E 1,573 856 (118) 2,311 2.5% 394 162 (17) 1 541 7% 23.4% (221) 320 12% (31) (14) (80) 195 16% 195 195 29%

Jun-22E 1,608 887 (121) 2,374 2.7% 411 171 (17) 1 566 5% 23.8% (223) 343 7% (28) (14) (88) 214 10% 214 214 10%

5.3 8% 2.1 40%

6.9 31% 3.4 62% 49%

8.3 20% 4.2 24% 51%

9.6 16% 4.8 14% 50%

10.5 10% 5.2 8% 49%

Jun-15A 230 (34) 196 (10) (9) 178

Jun-16A 280 (73) 207 (21) 7 193

Jun-17A 300 (81) 219 (20) (9) 190

Jun-18E 322 (99) 224 (8) (32) 184

Jun-19E 461 (84) 377 (33) (42) 303

Jun-20E 503 (69) 434 (33) (56) 345

Jun-21E 540 (26) 514 (31) (71) 413

Jun-22E 565 (23) 542 (28) (84) 430

Capex Acquisitions/disposals Investing cashflow - % of revenue Free cashflow

(176) (148) (324) 23% (146)

(154) (12) (165) 11% 28

(155) (29) (185) 13% 6

(204) (687) (891) 57% (707)

(198) (21) (219) 10% 84

(203) (21) (224) 10% 121

(208) (21) (229) 10% 183

(214) (21) (235) 10% 195

Equity issuance/(returns) Debt drawdown/(repaid) Dividends paid OtherFinancingCashflow Financing cashflow

289 (42) (253) (7)

4 5 (25) (1) (17)

7 13 (30) (1) (11)

593 167 (39) (12) 708

(27) (55) (2) (84)

(42) (77) (1) (121)

(89) (92) (3) (183)

(93) (102) (0) (195)

Net cashflow

(154)

11

(5)

Balance sheet ($m) Cash Debtors Fixed Assets Intangibles Other Total Assets Debt Creditors Other liabilities Total Liabilities Net Assets Net Debt / EBITDA (x)

1

0

Jun-15A 37 227 860 1,536 209 2,870 352 179 585 1,115 1,755

Jun-16A 48 224 897 1,568 172 2,910 359 179 590 1,128 1,782

Jun-17A 43 248 937 1,585 145 2,958 370 178 585 1,133 1,825

Jun-18E 45 265 1,204 2,264 146 3,923 768 196 533 1,497 2,426

Jun-19E 45 371 1,224 2,245 143 4,028 740 274 510 1,524 2,505

1.3x

1.1x

1.1x

2.2x

1.5x

(0)

0

(0)

Jun-20E 45 382 1,250 2,225 136 4,037 698 277 483 1,458 2,579

Jun-21E 45 392 1,279 2,204 136 4,056 609 281 484 1,374 2,682

Jun-22E 45 403 1,313 2,181 137 4,079 519 287 478 1,284 2,795

1.3x

1.1x

0.8x

SOURCE: MORGANS RESEARCH, COMPANY

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