If you’re looking for an economic theme with legs, recycling and waste management should be near the top of the list. Most people are aware of things such as the world’s need to reduce waste, the need to cut the volumes of waste going into landfill, and the harmful effects that single-use plastics have on the environment.
Everyone agrees, we should be doing better. There are clear economic benefits from handling waste more efficiently and cleanly, and of recycling. And on the back of these benefits, investors are beginning to understand the economic potential and importance of investing in recycling and waste management.
Recycling and the “circular economy” have powerful tailwinds behind them, for example rapid voluntary and mandated action towards carbon reduction; increasing regulation on plastics and waste, including Producer Responsibility legislation, and growing customer demand.
Tailwinds are a great thing to have, but it is not a crystal-clear correlation between helping to make the world a cleaner place and making a profit and paying dividends.
Here’s a look at four of the solid- material recycling stocks leading the way in the “circular economy.”
1. Sims (SGM, $14.91)
Market capitalisation: $2.8 billion
12-month total return: 0.4%
Three-year total return: 12.3% a year
Expected FY24 dividend yield: 2.5%, 47.3% franked (grossed-up, 3.1%)
Analysts’ consensus price target: $12.30 (Stock Doctor/Thomson Reuters, 13 analysts), $12.67 (FN Arena, six analysts)
Sims says its purpose is “to create a world without waste to preserve the planet.” That’s a big call, but Sims is a global leader in metals and electronics recycling. It is the world’s largest listed metals recycler, buying, processing and selling ferrous (containing iron, that is, scrap steel) and non-ferrous recycled and re-purposed metals, with the bulk of the non-ferrous side being aluminium and copper.
With operations in the United States, the United Kingdom and Australasia, Sims buys scrap feedstocks from metal dealers, auto wreckers and demolition firms. It then processes these feedstocks, usually by first shredding them, and then separating them into product streams capable of being reused and converted into everyday products. It sells these products around the world. Ferrous materials are primarily used in the steelmaking process, mainly by electric arc furnaces (EAF); Turkey is the largest buyer of Sims’ ferrous materials
Non-ferrous materials are sold to base metal smelters and converted into aluminium and copper: China is the largest buyer of its non-ferrous materials.
Sims’ Municipal Recycling business processes and markets more than 600,000 tonnes
of material annually in New York, New Jersey and Florida. In 2013, Sims won a 20-year contract with the New York City (NYC) Department of Sanitation — the largest municipal recycling contract in North America — to process the city’s residential recyclables. Each year, SMR processes and markets over 600,000 tonnes of recycled plastic, glass, metal and paper, including over 400,000 tonnes in New York City. By selling the materials to third-party manufacturers, SMR supports sustainable manufacturing supply chains for new goods and bolsters a burgeoning green economy.
Sims’ Brooklyn metals recycling facility (MRF), built from recycled steel, is the largest in the US. Sims has the opportunity for additional ten-year extensions in its NYC contract. Sims is a crucial partner in New York City’s ambitious plan to send zero waste to landfills by 2030.
Sims Lifecycle Services is a worldwide leader in IT asset and cloud infrastructure reuse, redeployment and recycling. The fourth division, Sims Lifecycle Services, offers IT asset disposition (ITAD) and electronic recycling solutions for businesses. Sims Resource Renewal
A circular business that operates in line with the waste hierarchy by using residue material from the metal recycling process to create new useful products.
Sims had an excellent year in FY22, with revenue rising 57% to $9.3 billion compared to FY21, operating cash flow surging by 323% to $547.8 million and net profit up 161%, to $599.3 million. Sims is a company that should attract an ESG (environmental, social and governance) premium, because of what it does.
There is just one problem – analysts see the stock as way over-valued, given that rising interest rates have cut into scrap metal demand and prices.
I think Sims is a great business and it is well-positioned for trends such as growing amounts of recycled metal in industry and infrastructure and the decarbonisation and “greening” of the economy – especially steel-making – and growth in electric vehicles, but there is simply better value elsewhere in the sector.
2. Cleanaway Waste Management (CWY, $2.72)
Market capitalisation: $6 billion
12-month total return: –9.2%
Three-year total return: 11% a year
Expected FY24 dividend yield: 2.2%, 12.5% franked (grossed-up, 2.3%)
Analysts’ consensus price target: $2.86 (Stock Doctor/Thomson Reuters, 14 analysts), $2.84 (FN Arena, seven analysts)
Cleanaway is the largest waste management total waste management, and industrial and environmental services business in Australia, operating in three segments:
Solid Waste Services: involves the collection, recovery, and disposal of solid waste.
Liquid Waste & Health Services: involves collection, treatment, processing, refining, recycling and destruction of liquids, hydrocarbons, chemical waste, specialised packaged and hazardous waste and e-waste, and the safe treatment and disposal of health-related waste
Industrial and Waste Services: provides a wide variety of services to Infrastructure and Resources markets. For example, the division recently won a large contract with a Tier 1 energy player that sees it involved in the decommissioning of the customer’s assets.
Simply put, Cleanaway is a big player in an essential services industry, with leading market shares in critical waste collection segments (municipal, commercial and industrial) in both collections (trucks collecting and delivering waste) and post-collections (landfills, resource recovery facilities, transfer stations). Like Sims, Cleanaway is a company that should attract an ESG (environmental, social and governance) premium.
Cleanaway has also partnered with Pact Group and Asahi Beverages to create Circular Plastics Australia (CPA), a joint venture to close the loop on PET plastic. This partnership creates valuable raw material sourced from container return schemes across the country to be turned into new beverage and food containers.
The company is also working with Qenos, Australia’s only manufacturer and leading supplier of world-class polyethylene and polymers, in a project to “close the loop” on soft plastics in Australia. The companies will jointly invest in the advanced recycling technology that will convert used soft plastics like food containers and shopping bags back into food-grade virgin quality plastic that can then be reused in the original packaging applications.
Qenos will invest in further upgrades to its existing plants to convert this recycled feedstock into a fully circular polyethylene called Alkanew, that can be used to remanufacture the very same packaging. Cleanaway is targeting the end of 2023 for a final investment decision (FID) on its proposed soft plastics project partnership with Qenos: Cleanaway says a “critical path item” will be Qenos having “line of sight” to its long-term energy supply, likely gas from either the Cooper or Gippsland Basins.
The company has begun a four-year Operational Excellence program, a series of initiatives to improve margins and profitability, that is targeting a $30 million boost to earnings before interest and tax (EBIT) benefit by FY25/26, which would represent about a 12% increase.
Cleanaway is doing some very impressive things, but it appears to have most of that baked into the share price.
3. Pact Group (PGH, $1.08)
Market capitalisation: $372 million
12-month total return: –55.2%
Three-year total return: –24.6%a year
Expected FY24 dividend yield: 7.4%, 65% franked (grossed-up, 9.5%)
Analysts’ consensus price target: $1.39 (Stock Doctor/Thomson Reuters, five analysts), $2.13 (FN Arena, four analysts)
Pact Group is the largest rigid packaging plastics manufacturer in Australia and New Zealand, with a growing footprint in Asia. The company’s vision is to “lead the circular economy” through innovative packaging, reuse and recycling solutions.
Pact’s venture into the circular economy began by providing reusable plastic crates for food growers to transport produce to Woolworths. It moved into recycling when China stopped accepting recycling waste from Australia in 2018.
Pact is certainly doing some interesting things. In February last year it opened Australia’s largest PET plant, in Albury, a collaboration with Cleanaway, Asahi Brewing and Coca-Cola. The world-class plant recycles the equivalent of one billion 600ml PET bottles each year into high-quality food-grade resin. The collaboration works by Cleanaway collecting, sorting and delivering PET plastic waste from kerbside collection bins and container deposit schemes to the Pact-operated plant for recycling; Pact uses its technical expertise to create the recycled resin; and the recycled resin is then used by Asahi and Coca-Cola to manufacture new beverage bottles, and by Pact to make new beverage bottles and food packaging.
A similar PET recycling facility is being built in Melbourne, where a mixed plastics recycling plant is also being built. Pact is investing $76 million to install new technology and equipment at its packaging manufacturing facilities around the country to increase the use of recycled materials in products such as milk bottles and food packaging. Pact is targeting 30% recycled content across its packaging portfolio by 2025.
In July last year, Pact announced a strategic partnership with Woolworths Group for the manufacture and supply of recycled packaging for the supermarket giant’s own brand range, including milk bottles, meat trays, fruit and vegetable punnets, and beverage bottles. Pact estimates that using recycled rather than virgin resin for Woolworths’ packaging will decrease annual carbon emissions by almost 25,000 tonnes and save around 1.2 million kilolitres of water per year.
Also, in June 2022 Pact acquired Synergy Packaging, a specialist manufacturer of PET and 100% recycled PET packaging for health and beauty packaging, broadening its portfolio further.
But the FY22 full-year result was a poor one, with revenue up just 4% to $1.8 billion, underlying net profit down 25%, to $70 million and reported net profit down 86%, to $12 million. The dividend was halved.
Pact said the year brought a challenging market and tough economic conditions, with its performance hit by higher costs of both input materials and labour, as well as additional costs due to the ongoing impact of COVID and supply chain disruption. But it said that it “continues to see escalating demand for recycled content.”
PGH has been a dire sharemarket performer in recent years – but it looks to be fairly good value at present, and its circular economy credibility is growing well. Also, if the FY24 dividend that analysts foresee is borne out, the stock offers a good bonus in terms of yield.
4. Close the Loop Group (CLG, 39.5 cents)
Market capitalisation: $133 million
12-month total return: 41.1%
Three-year total return: n/a (listed December 2021, at 20 cents a share)
Expected FY24 dividend yield: no dividend expected
Analysts’ consensus price target: 62 cents (Stock Doctor/Thomson Reuters, two analysts)
To my mind, Close the Loop Group is the most interesting of this group of stocks. The December 2021 listing came after the merger of Victoria-based businesses Close the Loop Group and OF Pack Group. Close the Loop Group started out in the early 2000s as a recycler of printer cartridges and toner; OF Pack provided flexible and carton packaging to brands all around the world.
The merged company provides flexible and carton packaging, flexographic print packaging, seafood packaging and bulk storage solutions, and the processing, recycling and refurbishment of print toner cartridges and other consumable products. The company sees future growth coming from breaking down things such as batteries, electronic waste, power tools and cosmetics, and repurposing them.
It takes recycled soft plastics and flexible packaging and turns it into a road additive product called TonerPlas that prolongs the performance of asphalt while providing a solution for troublesome plastic waste. Using recycled plastics from various sources, CLG has a recycled plastic resin called rFlex that allows for the creation of new rigid plastic products using a high percentage of recycled content.
Close the Loop Group has a variety of packaging films and formats available using varying percentages of recycled content. As packaging is one of the largest categories for plastic use, we feel this is vital for a circular economy. It works with key brands on the take-back of cosmetic packaging and phone cases to ensure these products are diverted from landfill. CLG also collects print consumables such as toner cartridges from its network, cleaning them for refill and reuse in a closed-loop system.
The company has locations across Australia, Europe, South Africa and the United States. CLG operates about 200,000 collection centres in the US (where people can drop off their goods for recycling or repurposing) and 60,000 in Australia, where people and businesses can deposit print cartridges and other urban waste. Earlier this month, Close the Loop picked up US recycling company In-Plas Recycling, strengthening its position in the recycling market.
Close the Loop reported net profit of $4.6 million for the year ended 30 June 2022, up 8%, on revenue that more than doubled, to $70.1 million. Earnings per share was 2.9 cents, but according to Stock Doctor/Thomson Reuters, the analysts’ consensus (sample of two analysts) expects steady growth in this measure, to 3.2 cents this financial year and 4 cents in FY24. Close the Loop is doing some extremely innovative things in packaging and the circular economy, and I think it looks like an exciting stock, as well.
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