As Peter Lynch aptly describes in his legendary investing book One Up on Wall Street: "The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name."
Waste management is about as boring as it gets. But in its defence, it is an essential function that societies will continue to rely on in perpetuity. With population growth not slowing anytime soon, more people equals more waste, and that can be considered a good thing for the businesses of Cleanaway Waste Management Limited (ASX: CWY) and Bingo Industries Limited (ASX: BIN).
These are 2 of the largest Australian companies in the waste industry, occupying market capitalisations of around 4.4 billion and 1.56 billion, respectively. Yet, despite being well-established members of the S&P/ASX 200 Index (ASX: XJO), both are often neglected due to their less than glamorous operations. Based on Lynch's thesis, perhaps this is a perfect type of company for long-term investors to derive significant financial returns from.
So what's the difference between these waste competitors, and should you invest in the waste management sector?
Cleanaway
The current share price for Cleanaway sits at $2.16, having bottomed out at $1.40 in March this year due to the widespread impacts of COVID-19.
While Cleanaway pulled its full-year FY20 earnings guidance on 24 March, the company will likely benefit from the majority of its operations being considered 'essential services' throughout the pandemic.
In its announcement, CEO Vik Bansal anticipated that demand for "health, municipal collections and related post-collections services to remain strong", as Cleanaway's clients mostly include local councils, hospitals, government infrastructure, and industrial businesses.
Cleanaway last issued earnings results to the market for the first-half of FY20 in February of this year. These results saw net profit after tax rise by 13.7%, accompanied by a 15.2% increase in earnings per share. A fully franked dividend of 2 cents per share was also issued, improving the company's annual yield at 1.8%.
Notably, however, the 1H FY20 results also showcased the financial impacts of several headwinds on Cleanaway. This included the introduction of Queensland's landfill levy, causing the company to pay per tonne of waste collected, coupled with lower revenue from commodities. Consequently, cash flow from operating activities decreased by 20%, highlighting that tighter margins continued to squeeze Cleanaway's profitability.
Aside from the financials, I like Cleanaway particularly for its recurring revenue. The company has done well to contract more than 75% of customers, the majority of which are multi-year deals. For example, its solid waste services (everyday garbage) has a typical contract duration of 7–10 years with municipal councils, whilst contracts for liquid waste collected from hospitals and health services usually extend for 3–5 years. These long-term contracts provide Cleanaway with sustainable earnings and may also free up further cash flow for investing activities.
Lastly, Cleanaway's Footprint 2025 strategy sees the company investing in a sustainable value chain, with a focus on plastic pelletising, cardboard pulping, and glass beneficiation. Due to external macro factors such as the national export ban on waste, Cleanaway expects to extract key value by investing in domestic processing facilities, thus working toward creating a circular waste economy. This focus on sustainability will no doubt be a big tick for ethical investors.
Overall, I'm a big fan of Cleanaway's recurring revenues and its eagerness to internally invest in promoting the efficiency of its value chain. But how does it stack up compared to up-and-coming competitor Bingo?
Bingo
Shares in Bingo currently sit at $2.23, having rallied 40% from their lowest levels at the peak of the pandemic.
Prior to COVID-19, Bingo delivered stellar results for 1H FY20. This included an increase in net revenues by 50%, earnings per share surging by 132% and a 28% increase in dividend, amount to a 1.88% annual yield overall. Such robust growth for a company that only listed on the ASX in 2017 is a highly positive sign for further profitability in the coming years.
More recently at the Macquarie Investor Conference last month, Bingo gave an update in light of the pandemic. Of particular importance, the company took this opportunity to communicate its intention not to pursue further debt funding or an equity raising during COVID. Bingo reported that its heavy investment in its internal operations platform, coupled with its approximate $700 million in assets, gave it enough flexibility and resilience to withstand the challenging economic environment.
Further, Bingo indicated that its earnings before interest, tax, depreciation and amortisation margins for Q3 FY20 remained above 30%, despite uncertainty forecasted for Q4 due to COVID-19. In particular, concerns linger due to a softening of commercial and industrial (C&I) end markets, such as shopping centres, commercial offices and hospitality. As C&I makes up 14% of Bingo's overall revenue, the company expects that earnings have declined by as much as 20–30% in this operational area throughout COVID-19. This is undoubtedly a short-term headwind.
In contrast, however, Bingo's exposure to infrastructure bodes well for the company in the near to long-term. With the federal and state governments implementing fast-tracked key economic projects through the JobMaker and other policies, Bingo's 25–30% earnings weighting toward infrastructure volumes will significantly benefit from these fiscal responses.
Liquidity doesn't appear to be a problem for Bingo, as shown by its lack of intent to raise capital. While its C&I earnings may take a short-term hit, I think the future remains bright for the company particularly due to its positioning toward infrastructure waste services and optimistic financial performance thus far.
Foolish takeaway
Both of these companies will continue to fly under the radar for many investors due to their unadventurous business activities, but it can't be denied that sustainable waste management will continue to be both a political and economic issue of increased prominence throughout this century.
If I had to choose between the two, I'd lean toward Bingo due to its impressive growth and greater potential as a fairly young company in the medium to long-term. Having said this, Peter Lynch would probably prefer Cleanaway – just because the business name 'Bingo' may seem too exciting for him…
