GFL Environmental Inc.

GFL Environmental Inc. (TSX: GFL) is North America’s leading diversified environmental services company. The company provides a comprehensive line of non-hazardous solid waste management, liquid waste management and infrastructure & soil remediation services. The company offers environmental services to more than 135,000 commercial and industrial customers. The company offers solid waste collection services to more than four million households.

• Recently, the company announced the acquisition of WCA Waste Corporation and its subsidiaries at a price consideration of US$ 1.212 billion. The acquisition would be financed through a private placement of USD 600 million of equity and the balance through a combination of cash balance and credit facility. WCA operates a vertically integrated network of solid waste and has presence across 11 US states.
• The company has closed its previously announced upsized offering of USD 750 million senior notes on August 25, 2020.

Q2FY20 Financial Highlights: GFL Environmental declared its quarterly results, wherein the company posted revenue of CAD 993.3 million, improved significantly from CAD 831.4 million. The growth was due to positive impact from acquisitions combined with improved pricing and surcharge, which was partially offset by the reduction in commercial activity as a result of the various measures taken by the Canadian and U.S. governments in response to COVID-19. Adjusted EBITDA stood to CAD 261.5 million, as compared to CAD 211.9 million due to strong income growth. Adjusted EBITDA margin stood at 26.3%, against 25.5% in the previous corresponding period (pcp). During the period, the company witnessed higher SG&A expense, due to an increase in salaries, benefits, information technology infrastructure investments and other costs related to the acquisition. Net loss widened to CAD 115.5 million from CAD 68.0 million in the previous corresponding quarter driven by mark-to-market loss in the tangible equity unit derivative purchase contracts amounting CAD 74.2 million. GFL ended the quarter with a cash balance of CAD 723.9 million, and a total asset of CAD 13,897.7 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company witnessed a lower sales volume from commercial and industrial activity due to various measures implemented by the Canadian and U.S. governments to restrict the limit the spread of COVID-19. Continuation of the above measures would hinder the company’s overall performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation:  The stock of GFL has appreciated ~23% so far this year. The company is likely to pursue its strategic and accretive growth opportunities as the group build on the record of successfully integrating acquired companies and realizing synergies. The Acquisition WCA Waste Corporation provides GFL with an attractive opportunity to enhance its geographical reach into the U.S. Midwest and Southeast, through a network of vertically integrated assets with a strong regional market presence in the States of Texas, Florida and Missouri, which augurs well for improved business prospects. With a strong balance sheet, available liquidity and proven access to the capital markets, the group is well-positioned to continue to pursue strategic and accretive opportunities. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have peers like Waste Connections Inc, Republic Services Inc and Brookfield Renewable Partners LP etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 27.50 on September 25, 2020.

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

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