Waste Connections Inc.

Waste Connections Inc. (TSX: WCN) is one of the largest integrated providers of traditional solid waste and recycling services in North America. The company operates through 86 active landfills, 124 transfer stations, and 66 recycling operations. The Group serves residential, commercial, industrial, and energy end markets.

The company announced that it would disclose the third-quarter results on October 28, 2020.

Q2FY20 Financial Highlights: Waste Connections announced its quarterly results, wherein the Group posted revenue of USD 1,305.782 million, lower than USD 1,369.639 million in the previous corresponding period (pcp). The company’s operations were impacted due to a lower revenue primarily in solid waste commercial collection and solid waste transfer and disposal due to a slowdown in activity on account of closure restrictions and requirements imposed due to the COVID-19 pandemic. Cost of operations, however, stood lower at USD 785.710 million compared to USD 815.819 million in pcp. Operating loss stood at USD 232.357 million, as compared to an operating income of USD 222.134 million. The company reported a net loss of USD 227.467 million as compared to a net profit of USD 148.839 million in the previous corresponding quarter. The erosion in the bottom-line was due to a surge in the impairments and other operating items amounting to USD 437.27 million, against USD 3.902 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A prolonged lockdown or any other containment measures announced by the government would result in a tepid volume from the commercial segment. As a result, the company’s performance would impact adversely.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of WCN stood resilient in the recent past and appreciated ~18% so far this year. The business is classified under ‘essential services’ and is immune to the economic cycles. The company has provided guidance for FY20, wherein the revenue is expected to be ~USD 5.325 billion, while net income is likely to be ~USD 184 million. For FY20, the company expects its adjusted EBITDA at ~USD 1.610 billion, representing ~30.2% of expected revenue. The company anticipates net cash provided by operating activities within the range between USD 1.344 billion and USD 1.374 billion. The company has cited for a capital expenditure of USD 550 million for FY20. Further, we expect the volume of the solid waste commercial is likely to improve in the coming quarters, as most of the industrial and manufacturing activities are reopening gradually. The stock has closed above its 200-days simple moving average of CAD 126.78, indicating a bullish trend. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of higher single-digit (in percentage terms). For the said purposes, we have peers like Clean Harbors Inc, Advanced Disposal Services Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 139.63 on September 29, 2020.

WCN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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