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, operating 86 active landfills, 124 transfer stations, and 66 recycling operations.

Q1FY20 Financial Highlights: WCN reported its quarterly result and posted revenue of USD 1,352.40 million, as compared to USD 1,244.64 million in the previous corresponding quarter. The growth was driven by a combination of higher price and increased volume. The company reported improved revenue from Solid Waste Collection and Solid Waste Disposal and Transfer, while Solid Waste Recycling and E&P Waste Treatment, Recovery and Disposal reported a decline. During the quarter, operating income soared to USD 216.96 million from USD 184.86 million in the previous corresponding period (pcp). The quarter was marked by an increase in the cost of operation, higher selling, general & administrative and a higher amortization cost. Interest expense stood slightly higher at USD 37.99 million against USD 37.28 million in pcp. The company reported net income at USD 142.89 million, as compared to USD 125.57 million in pcp. Adjusted EBITDA during the first quarter stood at USD 408.5 million, improved from USD 385.7 million in pcp. The company ended the quarter with cash and equivalents of USD 1,195.28 million, while total assets stood at USD 14,279.41 million. Cash flow from operating activities improved to USD 369.59 million, from USD 363.77 million in pcp. During the first quarter of FY20, the company invested USD 133.63 million.

Q1FY20 Income Statement (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 Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of WCN appreciated ~6% so far this year, despite a free fall in the equity market. The company’s offerings come under essential services and are immune to economic cycles. Investors should note that the stock was trading above the 200 days simple moving average of CAD 123.02, indicating a bullish trend. To ensure optimum liquidity, the company has lowered its FY20 capital expenditure by ~20% coupled with various cost control measures. The company witnessed a 6% annual decline in April 20 revenue owing to a slowdown in demand; however, solid waste trends have improved sequentially in late April and into early May. As the economic and industrial activities are returning on track; the demand for company’s offering would increase, which in turn would result in improved performance. We have valued the stock using Price to Earnings based relative valuation approach and considered peers like Clean Harbors Inc, Republic Services Inc and Waste Management Inc, etc., and arrived at a target price offering lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 125.47 as on July 3, 2020.

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

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 that it entered into a definitive agreement to acquire a portfolio of waste management assets at a price consideration of USD 835 million. These assets are likely to generate an annualized revenue of USD 345 million.

Q1FY20 Result Highlights: GFL announced its quarterly results, wherein revenue soared ~29% to CAD 931.3 million, underpinned by organic growth along with the positive impact of the acquisition. The company reported adjusted EBITDA of CAD 222.9 million, up 24.4% primarily attributable to strong revenue growth in the quarter. The company witnessed a higher loss on foreign exchange and inclusion of Mark-to-market gain on TEU derivative purchase contract costs of CAD 88.43 million during the quarter. Interest and other finance costs stood at CAD 269.41 million, increased significantly from CAD 123.94 million in pcp. Net loss increased to CAD 277.95 million from CAD 93.4 million a year ago driven by costs associated with the initial public offering and the early redemption of several series of outstanding unsecured bonds.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Any extension of lockdown is likely to result in a soft demand from the commercial and industrial segment, which would hamper the overall revenue and cash flows. 

Valuation Methodology: EV to Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of GFL remain resilient and appreciated ~16% so far this year, outperforming the benchmark index by ~22%. The recent acquisition of waste management assets is expected to enhance the company’s presence across the U.S. and is expected to contribute ~USD 345 million to the company’s topline. The acquisition would add high-quality complementary assets to GFL’s portfolio with a diversified customer base. On the liquidity front, the company has ample liquidity of ~CAD 700 million of cash and ~CAD 600 million of revolving credit facility, which seems sufficient to support the current working capital requirements. We have valued the stock using EV to Sales based relative valuation approach and considered peers like Clean Harbors Inc, Republic Services Inc and Waste Management Inc, etc., and arrived at a target price offering high single-digit upside potential (in % terms). Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 25.90 as on July 3, 2020.

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

Disclaimer

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