Waste Connections Inc.

Improved Income Aided by Higher Price Realization: Waste Connections Inc. (TSX: WCN) is an integrated solid waste management company which operates in non-hazardous waste collection, transfer, disposal and recycling services in the U.S. and Canada. The company will announce its first quarter FY20 results on May 6, 2020.

Recently, the company announced the pricing of its US$ 500 million senior notes. WCN will use the proceeds to repay a part of revolving credit facility and borrowings.

WCN paid a quarterly cash dividend of US$ 0.185 per common share, higher than US$ 0.160 in the previous corresponding quarter. Meanwhile, the company distributed US$ 175.06 million as a cash dividend, higher than US$ 152.55 million in FY18.

Outlook: For FY20, the company expects revenue within the range of US$ 5.725 billion to US$ 5.775 billion, while net income attributable is expected within the range of US$ 653 million to US$ 668 million. Adjusted EBITDA is estimated in the range of US$ 1.760 billion to US$ 1.785 billion, representing 30.7% to 30.9% of the revenue. Capital expenditure is expected at US$ 625 million, while adjusted free cash flow is estimated in the range of US$ 975 million to US$ 1 billion.

FY19 Financial Highlight: For the period ended December 31, 2019, the company posted US$ 5.389 billion, up 9.5% over FY18. The increase was driven by higher price realization in solid waste, increase in E&P activities, and benefits from acquisitions. Adjusted EBITDA increased 6.8% y-o-y to US$ 1.674 billion. Adjusted net income came in at US$ 719.6 million, up from US$ 667.3 million in the prior-year.

Net cash provided by operating activities increased 9.2% y-o-y to US$ 1.541 billion, while adjusted free cash flow came in at US$ 916.8 million. 

FY19 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/E Multiple Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendations: The stock of WCN is trading at CAD 122.27 with a market capitalization of CAD 32.19 Billion. The stock has generated a positive return of ~3.66% this year and stood firmly despite the stiff correction in the global market due to panic selling strategy on account of COVID 19. WCN is expecting a higher FY20 revenue, supported by higher realization prices. The business has reported higher free cash flow in FY19, while the current outlook ensures higher cash flow generations in coming days. The company is a leading player within the waste management segment, and it will be prudent to accumulate the stocks in order to mitigate the risks during challenging economic phases. We have valued the stock using the P/E based relative valuation methodology. We have taken peers like Clean Harbors Inc (TSX: CLH), Advanced Disposal Services Inc (NYSE: ADSW), Waste Management Inc (NYSE: WM) etc. and arrived at a target price of lower double-digit upside potential (in% terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 122.27 as on April 10, 2020.

WCN One-Year Daily Price Chart (Source: Thomson Reuters) 

Canadian Pacific Railway Ltd

Higher Profitability Driven by Improved Income and Cost Controls Synergies: Canadian Pacific Railway Ltd (TSX: CP) provides rail and intermodal services across Canada and the United States. The group operates across a total network of ~12,700 miles.

During FY19, CP paid an annual cash dividend of CAD 3.14 per common share, higher than CAD 2.5125 per share in the previous year. During the year, the company repurchased 3,794,149 shares at a price consideration of CAD 1,141 million.

Outlook: For FY20, the company expects adjusted diluted EPS to grow at higher single-digit to low double-digit aided by decent volume growth. Capital expenditure is expected at ~CAD 1.6 billion. The company expects its effective tax rate at 25%.

FY19 Financial Highlights: For the period ended December 31, 2020, CP posted revenues of CAD 7,792 million, up 7% y-o-y. The y-o-y increase reflects higher freight revenues. Operating income stood at CAD 3,124, as compared to CAD 2,831 million in the previous financial year. The increase was aided by higher freight rates and improved operating performance and asset utilization. Adjusted net income stood at CAD 2,290 million, as compared to CAD 2,080 million in FY18, thanks to higher operating income. The company made a marginal reduction in its long-term debt to CAD 8,158 million, as compared to CAD 8,190 million in FY18. The company exited the year with cash and cash equivalents of CAD 133 million while total assets worth CAD 22,367 million.

FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of CP is quoting at CAD 315.75, with a market capitalization of 43.26 billion. The company has generated higher free cash flow of CAD 1,357 million, as compared to CAD 1,289 million. The company is one of the leading players within the bulk commodities and merchandise freight segment. The company is emphasizing on cost control and productivity initiatives to support margins. The stock is currently trading at a forward EV/EBITDA multiple of 12.5x against the peer group average of 11.5x. We believe, the upside in CP stock seems capped at the current levels as positives are already reflected in the stock price. Hence, we have a ‘Watch’ stance on the stock and look for the growth catalyst.

CP One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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