What is the stock?
Cleanaway is a major waste management and recycling company and owns strategic landfill sites on the eastern seaboard. The company has made a number of acquisitions in the past decade. In recent years, Cleanaway has sold its New Zealand business and other assets which were deemed non-core. Management has decided to streamline the company and to increase focus on improving the profitability of the business.
How long have you held the stock?
We built a position in Cleanaway when the stock was recently sold down to under $1.00.
What do you like about it?
The medium-term outlook for waste management is positive — we continue to generate more waste every year, which we need to manage in an efficient and environmentally friendly manner.
Against this backdrop, Cleanaway holds a market leading position due to its extensive network of collection services and stations. Management has the opportunity to build on these assets by allocating capital and resources to gain market share and improve profitability.
How is it better than its competitors?
The sector is competitive and is susceptible to periods of heightened competition and large contracts will be won and lost. Cleanaway’s edge lies with its assets: an extensive network of collection routes, landfill sites and processing sites.
What do you like about its management?
Management is not Cleanaway’s strongest point. There has been a high level of turnover in the past. The current management team has made a promising start to re-orientating the company towards better discipline in capital resources and improving returns for shareholders.
What is your target price?
Based on current information, we have set a $1.20 target price.
At what point would you sell it?
The investment thesis is focussed on the company’s ability to defend and gain market share off its competitors while focussing on taking costs out of its operations. Market share losses could indicate Cleanaway’s inability to gain traction on recent initiatives to improve customer acquisition, or heightened competition in the sector. Both have negative implications for Cleanaway’s profit margins.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
The company is a relatively new position.
Where do you see the value?
Recent profit results have been underpinned by good improvements in the company’s cash flows. As a consequence, Cleanaway’s gearing has declined to a comfortable level. This gives Cleanaway options to consider acquisitions that would add scale to the business. The potential upside from scale is positive for margins as a number of Cleanaway’s assets operate on a relatively high proportion of fixed costs.
Source: Yahoo!7 Finance
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