My kids are fans of ABC TV program War on Waste. They tell me about the environment perils of plastic straws and describe plastic bags as turtle killers! Heaven help me if I forget to separate waste materials at the bin or drop my recycling standards.
I prefer a different kind of war on waste: listed companies competing for revenue in the growing waste industry. With Australia’s population expected to double by 2050, it’s a no-brainer that more people will lead to more waste collected, recycled or disposed of in landfill.
Population growth also drives building construction, a big user of waste services. My daily morning walk takes me past a large aged-care property development in a nearby street. The site is full of skip bins provided by Bingo Industries, one of my preferred waste stocks on ASX.
With Australia’s infrastructure pipeline growing by the day (witness the latest multi-billion-dollar rail development announced in Melbourne this week), industrial waste has to grow. That means more demand for waste services and higher industry revenue.
The waste industry is on the cusp of a recovery. It grew a meagre 0.3 per cent annually over 2013 to 2018, according to IBISWorld. The leading business forecaster predicts the waste industry will grow annual revenue by 3.2 per cent from 2018 to 2023.
IBISWorld says 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”.
I outlined a bullish case for ASX-listed waste stocks in The Bull in March 2018 and referenced the IBISWorld research. Much has happened since then.
One of the waste sector’s largest stocks, Cleanaway Waste Management, completed its takeover of Tox Free Solutions in May 2018. Tox is a terrific small-cap waste company and Cleanaway saw an opportunity to increase its scale as the industry recovers.
China’s recycling ban – a set of import restrictions imposed under its Blue Sky/National Sword program – made national headlines earlier this year. The Federal Government estimated that about 3.5 per cent of recycling in Australia in 2017 was exported to China.
Bingo Industries in May said China’s recycling import restrictions had little effect on the company: only a tiny fraction of its revenue comes from paper, cardboard and plastics recycling. Waste companies that collect co-mingled household waste were more affected.
Bingo has rallied from $2.60 to $3.15 since my story for The Bull in March, having peaked at $3.27. To recap, Bingo joined ASX in May 2017 after raising $440 million in an IPO through the issuance of $1.80 shares. Bingo is among the best-performing floats from that year.
Capitalised at $1.3 billion, Bingo operates mostly in New South Wales through resource-recovery and recycling centres. A fleet of more than 250 vehicles collects thousands of bins and Bingo is strong in building and demolition waste collection, and infrastructure.
The market liked Bingo’s full-year profit, announced this month. The company outperformed its revised FY18 guidance, delivering 44 per cent growth in revenue and net profit over the year. The shares spiked almost 10 per cent on the news.
The market welcomed Bingo’s acquisition of Dial-a-Dump Industries (DADI), a fully integrated recycling and waste-management services provider with an enterprise value of $577.5 million. The acquisition expands Bingo’s processing capabilities into timber shredding, brick and concrete crushing, and scrap-steel recycling in Sydney.
I am surprised broking analysts did not comment on the 82 hectares of real estate in the Western Sydney Growth Precinct that comes with the deal (and was somewhat buried in the FY18 results presentation). It could help Bingo develop a unique “Recycling Ecology Park” in Australia’s epicentre of population growth and thus waste-collection demand.
Bingo’s FY19 guidance was a touch weaker than expected, partly due to network redevelopment delays (an issue that slightly affected its original prospectus forecast).
Macquarie Group, lead manager to the Bingo float, has a $3.20 price target for the company over 12 months and an outperform recommendation.
The investment bank said in a research note after Bingo’s result: “The DADI acquisition brings additional growth potential to the group, positioning it for the medium- to longer-term establishment of a broader array of waste-management capabilities. In the meantime, we think the asset will be strongly cash generative to support Bingo’s broader market ambitions.”
An average share-price target of $3.28, based on the consensus of four broking firms (too small a sample to rely on) implies Bingo is slightly undervalued at the current price. The lowest price target among brokers is $3.20 a share.
Bingo’s full-year result reinforces my favourable view, although share-price gains might be slower from here. I wrote in March: “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.”
As a mid-cap with limited history as a listed company, Bingo suits experienced investors who understand the risks of investing in this part of the market. Waste collection is notoriously competitive and subject to higher regulatory risk. The industry can be volatile.
Chart 1: Bingo IndustriesSource: The Bull
• 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 consider its appropriateness and accuracy, 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 August 29, 2018.