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. 

Q2FY20 Financial Highlights: WCN declared its quarterly results, wherein the Company reported revenue of USD 1,305.782 million, slightly lower than USD 1,369.639 million in the previous corresponding period (pcp). The decline in the income was majorly attributable to suspended or reduced activities in the second quarter of FY20. Adjusted EBITDA, during the second quarter, stood at USD 394.3 million as compared to USD 425.3 million a year ago. The Company reported a net loss of USD 227.467 million as compared to a profit of USD 148.839 million in the previous corresponding quarter. The bottom-line was marred due to a significant increase in the impairments and other operating items amounting to USD 437.27 million as compared to 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.

Outlook: The Company expects its top line to be around ~USD 5.325 billion for FY20, while net income is estimated at ~USD 184 million and adjusted EBITDA at ~USD 1.610 billion, representing ~30.2% of revenue. The Company anticipates net cash provided by operating activities within the range between USD 1.344 billion and USD 1.374 billion.

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 ~14% so far this year. The business is classified under ‘essential services’ and is immune to the economic cycles. Investors should note that the stock was trading above the 200-days simple moving average of CAD 124.52, indicating a bullish trend. The Company reported a net loss due to Impairments and other operating items amounting USD 437.27 million and excluding this the bottom-line would have been higher than the previous corresponding period, which suggests a solid operating growth, which is impressive amidst a fall in the top-line. As per the FY20 outlook, the Company expects a stable performance, which is noteworthy looking at the current economic scenario where most of the businesses are struggling to retain its top-line. The group mentioned that volume in the solid waste segment was picking up and was better than the expectations. We expect the volume to increase as the economic activities are returning on track. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered industry (Professional and commercial services) average on NTM basis. Hence, considering the aforesaid facts, current price movement and stable business outlook, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 133.88 on August 10, 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.

Q2FY20 Financial Highlights: GFL announced its quarterly results, wherein the company posted revenue of CAD 993.3 million, reflecting a growth of 19.5% on y-o-y basis. The growth was underpinned by the positive impact from acquisitions coupled with pricing and surcharge increases while a decline in sales volume by 8.3% on y-o-y basis, remained a drag. Adjusted EBITDA soared to CAD 261.5 million, depicting an increase of 23.4% over the previous corresponding quarter, due to strong income growth. Adjusted EBITDA margin stood at 26.3%, as compared to 25.5% in the previous corresponding period (pcp). The quarter was marked by a higher SG&A expense, which increased to CAD 104.1 million, as compared to CAD 81.4 million in pcp due to incremental salaries, benefits, information technology infrastructure investments and other costs related 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. The company ended the quarter with a cash balance of CAD 723.9 million, while total assets stood at 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: Price to Cash Flow Based (Illustrative)

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

Stock Recommendation: The stock stood resilient in the recent past and appreciated ~22% so far this year. The business of waste management is categorized as essential, and the group has reported that most of the operations remained functional in the recent past. The group is focused on pursuing growth strategies, including through organic revenue growth and acquisitions. In June, the group announced the acquisition from Waste Management, Inc. and Advanced Disposal Services, Inc. of a portfolio of vertically integrated solid waste collection, transfer, recycling and disposal assets across 10 states. The said acquisition is likely to drive the business growth going forward. 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.  Temporary suspension and restrictions imposed by Government bodies have remained as a drag for the Company. However, we believe with the reopening of the economy, the business would be benefited from higher volumes. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered the sector (industrial) average multiple on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 27.45 on August 10, 2020.

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

Disclaimer

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