Environmental stocks in the cleantech and renewable energy fields often get most of the kudos of being “green” stocks, but there’s plenty of profitless potential attached to them. Where there is profit in the environmental field is the waste management and recycling sector, which does not quite come across as glamorously as the cleantech and renewable energy worlds. Here is a look at four of the ASX’s hard-working waste managers and recyclers, which are all doing great work in the dirty jobs that keep society functioning – and generating dividends for shareholders in the process.
Sims Metal Management (SGM, $13.44)
Market capitalisation: $2.7 billion
FY18 projected yield: 3.3%, 83.34% franked
Five-year total return: 8.78% a year
Analysts’ consensus target price: $14.53
Source: ASX
It takes a bit of a stretch to view Sims Metal Management (SGM) from an environmental point of view, but as the world’s largest listed metal and electronics recycler, Sims has plenty of credibility as an environmental stock. The company’s main business is scrap metal, where it takes scrap from recycled items such as cars and household appliances through its buyers and network of scrap yards and sells it to electric arc furnaces (EAFs) to make steel – EAFs were developed to operate exclusively on recycled steel instead of iron ore.
The company also captures and resells non-ferrous metals such as copper and aluminium. Its electronics recycling business, Sims Recycling Solutions, is the largest in the industry, operating 33 facilities in more than 20 countries. This business doesn’t just collect waste: Sims describes it as an “asset management” business, because it manages for corporate clients – and electronics producers – the recycling of retired IT and electronic assets. The company’s smallest operation, Sims Municipal Recycling, receives and recycles household waste in cities such as New York City and Chicago – Sims aims to roll out its successful NYC model in other big US cities.
Sims works in the unsexy, but necessary, world of recycling. But the company is heavily exposed to the global steel market – and particularly, Chinese steel exports – since its major product is used in steel. Add to that the fact that the global scrap markets are very competitive, and you get a situation where nobody talks glowingly of Sims just because it cleans up rubbish.
In 2014, Sims unveiled plans to more than quadruple its earnings by 2018, announcing a five-year plan to lift earnings through improvements to its operational performance, and in effect, move away from cyclicality as much as it can, by improving its operational performance. It has had impressive results so far, and investors are noticing, but the fact that global steel demand is strong, while Chinese exports are falling, remains the major positive for the share price at the moment.
In FY17, Sims delivered a 9.2% rise in revenue, to $5.08 billion; a 60% boost to operating earnings, to $294.7 million; and a tripling of underlying net profit, to $120.1 million. Return on capital is now 8%, compared to 2.3% in FY13.
Analysts see earnings per share (EPS) falling in FY18 before moving higher again in FY19, but they also see dividends rising in both years, and plenty of scope for share price gain. Sims offers a grossed-up dividend yield of about 4.4% in FY18 and 4.7% in FY19.
Cleanaway Waste Management (CWY, $1.527)
Market capitalisation: $2.4 billion
FY18 projected yield: 1.6%, fully franked
Five-year total return: 12.8% a year
Analysts’ consensus target price: $1.36
Source: ASX
Cleanaway (the former Transpacific Industries) is Australia’s leading provider of waste management, industrial and environmental services, with operations in both solid and liquid waste. In solid waste, Cleanaway works in collection, transportation, recycling and disposal of waste for municipal, commercial, industrial, construction and demolition clients across Australia. It operates waste processing facilities, transfer stations, landfills, resource recovery and recycling facilities, serving more than 90 municipal councils and more than 120,000 commercial and industrial customers around Australia.
The company’s liquids and industrial services division collects, treats, processes and recycles liquid and hazardous waste. For example, it collects and refines used mineral oils, and produces fuel oils and base oils from that. Cleanaway provides services such as Industrial cleaning, vacuum handling, sludge management, site remediation, facilities maintenance services and emergency response services. Cleanaway is Australia’s largest hydrocarbons recycling business: in the last 12 months, the company collected and processed about 130 million litres of mineral oil – offsetting Australia’s annual requirements for oil by 900,000 barrels.
Like Sims Metal, this is dirty, unglamorous work, but work that the community expects to be done. And it’s work that Cleanaway does in a high-tech way. For example, this year in Perth it opened one of the most advanced recycling facilities in the southern hemisphere, the Perth Materials Recycling Facility (Perth MRF). Capable of handling the city’s entire household recyclable waste, the Perth MRF can process up to 250,000 tonnes annually. It uses state-of-the-art optical sorting technology, which allows the company to handle up to eight different waste streams, including paper and cardboard, glass, aluminium, steel, and plastics.
It’s also work that Cleanaway performs profitably. Analysts see Cleanaway’s EPS staying flat this year at 5.3 cents before rising to 6.2 cents in FY19, but the fully franked dividend is expected to rise from 2.1 cents in FY17 to 2.4 cents this year, and to 3 cents in FY19. Cleanaway has a solid couple of years in share price growth – from 59 cents two years ago, the stock has climbed to $1.527 – but analysts’ consensus sees it as fully valued at present.
Bingo Industries (BIN, $1.935)
Market capitalisation: $675 million
FY18 projected yield: 3.3%, unfranked
Five-year total return: n/a
Analysts’ consensus target price: $2.48
Source: ASX
New South Wales-based waste management and recycling company Bingo Industries joined the ASX in May, and subsequently has expanded into Victoria. Bingo is a vertically integrated waste management operator, working across the waste collection, processing, separation and recycling components of the waste value chain. Bingo has specialised operations in building and demolition (B&D) waste – the waste produced by demolition and construction of residential and commercial buildings, civil projects, infrastructure development and household renovations and repairs – and commercial and industrial (C&I) waste, which is collected from commercial buildings and businesses, government facilities, educational institutions and industrial sites.
The recent expansion into Victoria – the first step in what Bingo says will be a national expansion – added two recycling centres to the 10 the company runs in New South Wales, and 40 trucks. Bingo posted a $19.8 million net profit for FY17, 10% above the prospectus forecast. On a pro forma basis, net profit came more than doubled to $32 million, while revenue of $209.7 million was up 47% on FY16, and 3% ahead of the prospectus forecast.
After listing at $1.80 a share in May, the shares rose as high as $2.30 in September, before slumping in August to $1.90 after Bingo was named in a Four Corners investigation into dubious practices in the waste industry. They are trading at $1.935.
Four Corners and other media reports referred to two of Bingo’s New South Wales sites as having sub-standard procedures. The Environment Protection Agency (EPA) has commenced proceedings in the Land & Environment Court of New South Wales to stop Bingo accepting further waste at one of these sites until 24 November 2017 and ensure compliance with its limits for the subsequent annual period. Bingo has updated the market on the issues it is working through at the two sites, saying that neither of these events is expected to have a material impact on FY18 earnings guidance, and that the “trading momentum” of the underlying business remains strong and is performing in line with forecast.
Bingo’s previous guidance was for FY18 pro forma EBITDA (earnings before interest, tax, depreciation and amortisation) of $89 million, which would be a 39% lift on FY17. The company says it expects to start paying dividends in the current half (to December 31). The analysts’ consensus price is $2.48.
Tox Free Solutions (TOX, $2.52)
Market capitalisation: $489 million
FY18 projected yield: 3.8%, fully franked
Five-year total return: 1.2% a year
Analysts’ consensus target price: $2.39
Source: ASX
Tox Free Solutions is also a waste management company, which has diversified from its beginnings serving the resources industry into the heavy manufacturing, healthcare, civil infrastructure, municipal, utilities and hazardous wastes fields. Its most recent move took it into the medical waste business, with the 2016 acquisition of Daniels Health Australia, which brought with it Sharpsmart, Australia’s most widely used sharps disposal system, and the Clinismart system for clinical and medical waste collection.
Straight away, the healthcare business proved an effective diversification, generating about 25% of Toxfree’s EBITDA in the second half of FY2017. This was very handy, given that the Waste Services operations – which serve the mining and energy industries, and are the largest contributor to EBITDA – saw a 35% fall in operating income in FY17, on the back of weaker activity in the oil and gas sector.
FY17 revenue rose by 26%, to $496.1 million, while net profit was 2% lower, at $12.4 million. Tox Free lifted its full-year dividend by 3% to 9.5 cents a share, fully franked.
Analysts expect weaker EPS from Tox Free this year – 12.9 cents a share for FY18, compared to 13.8 cents in FY16 – before a rebound to 14.1 cents in FY18. They predict the dividend will stay the same this year, but rise to 9.9 cents in FY19, which would represent a yield of 3.9% (grossed-up yield of 5.6%) at the current share price of $2.54. However, analysts see the stock as over-valued compared to consensus target price, at $2.39.
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