Rampant population growth in Sydney and Melbourne, and its impact on accommodation, infrastructure and liveability, attracts almost daily headlines. Less considered is the waste that millions of extra residents will create and what that means for garbage disposal.
Waste is big business in Australia. Business forecaster IBISWorld estimates the solid waste-collection services industry has annual revenue of $5.2 billion. Waste transportation is a large industry as more garbage is shipped interstate or overseas.
But the waste-disposal industry overall has underperformed the broader economy. The sector grew a meagre 0.3 per cent annually over 2013 to 2018, says IBISWorld. A sluggish economy and rising waste-collection competition weighed on industry revenue.
That is changing. Industry revenue will jump to 3.2 per cent annually from 2018 to 2023, predicts IBISWorld in its February 2018 report on solid-waste collection. That is an impressive turnaround and good news for ASX-listed companies Cleanaway Waste Management, Bingo Industries and Tox Free Solutions.
IBISWorld notes: “The industry is in the growth phase of its life cycle, as waste-collection services are expanding in response to increased environmental awareness, population growth and rising demand for services due to trends favouring outsourcing.”
Several tailwinds are driving the waste industry. The first is population growth. Victoria, for example, is expected to have 10.1 million residents in 2051, from an estimated 4.82 million in 2017, according to State Government projections. Sydney has a similar growth trajectory.
More people means more waste and rising demand for waste-collection services. It is mind-boggling to consider how industry will collect and dispose of waste from an extra 5 million people in Victoria in three decades – and where that waste will go.
Increased construction activity is another driver. As population growth drives residential property development, the volume of masonry waste is rising. One need only visit a major capital city to see the construction underway and the building waste being collected.
Hospitality is another waste tailwind. Australians continue to allocate more of their discretionary income to takeaway food. That means plastic containers, bags and cutlery, pizza boxes and other types of waste that are not associated with home-cooked food.
Longer term, a move towards “disposable” products will add to waste demand. Cheaper clothes, jewellery, furniture, electronics and other products are being disposed of faster, meaning extra waste. Also, the move towards do-it-yourself products is adding to waste: think of all the cardboard packaging that accompanies IKEA furniture, for example.
If your council provides an annual or bi-annual “hard rubbish” service, look at how much waste residents have and how quickly it often piles up on street footpaths. And which companies collect it, after scavengers have been through it, and where that waste goes.
As industry revenue grows, margins should modestly expand. Services that separate recyclables collection, and collection of hazardous and electronic waste, typically have higher margins than generic waste. Demand for both forms of waste collection is rising.
Sadly, there’s not much scope to play the waste trend. ASX-listed Cleanaway is the market leader with an estimated share of 15.5 per cent, followed by the foreign-owned Veolia Environmental Services and Suez Recycling & Recovery Holdings. Privately owned J.J. Richards & Sons makes up the fourth of the industry’s main players.
At the smaller end, Tox Free Solutions has an estimated 4.1 per cent market share on IBISWorld numbers and Bingo Industries, has 1 per cent.
Bingo is an interesting idea for investors who are comfortable with small-caps. The company joined ASX in May 2017 after raising $440 million in a difficult Initial Public Offering (IPO) market. Bingo’s $1.80 issued shares are now $2.60.
Chart 1: Bingo IndustriesSource: The Bull
Capitalised at $1.07 billion, Bingo operates mostly in New South Wales through nine resource-recovery and recycling centres. A fleet of 253 vehicles collects thousands of bins across a range of purposes. Bingo is strong in building and demolition waste collection, and the infrastructure sector.
Bingo’s recent half-year result for FY18 was just below expectation. Revenue of $142.4 million was broadly in line with analyst estimates but after-tax net profit of $21.3 million was a touch below. Revenue grew 42 per cent and profit 37 per cent on the half.
Encouragingly, the company beefed up its management structure to support a larger operation, even though that initiative added to cost. It is possible that Bingo’s processing capacity could triple to 3.4 million tonnes a year by 2020, meaning a larger organisation structure is required – a move that should have long-term benefits.
Bingo looks well placed to benefit from the strong infrastructure program in Victoria and NSW in the next five years. The infrastructure sector now accounts for 16 per cent of its bin revenue and should offset any decline in waste collection in residential housing. Also, Bingo has low exposure to China’s Minimal Sword policy, which bans some waste importation from other countries.
Bingo should lift its market share in the next few years and benefit from the industry’s expected growth. The company is expanding through acquisitions and organic initiatives, has a good industry position and a service that is attracting new clients.
The consensus of four broking firms (too small to rely on) that cover Bingo is an average price target of $3.12. Macquarie has a $3 price target over 12 months. That suggests Bingo remains undervalued, even after recent price gains.
The stock’s forecast Price Earnings (PE) multiple of 21 times in FY18 falls to 17.6 times in FY19 on Macquarie’s numbers.
Price gains will be slower from here, but Bingo’s re-rating, which kickstarted in November, can be sustained this year. The combination of rising market share in a growing industry should help Bingo maintain high earnings-per-share growth rates that justify a rising valuation in the next few years.
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at March 8, 2018.