This Post Market Wrap is presented by KOSEC – Kodari Securities

• Rising fuel cost impact estimated at $10m

• Flood related equipment and landfill disruption cost estimated at $10 – $14m   

• Labour shortages resulting in operational inefficiencies

• Rise and fall clauses will see cost recoveries, with six-month lag effect

• Cleanaway well-positioned for a low carbon future and high circularity environment 

• Operational scale, geographical coverage, and proximity to waste infrastructure support earnings growth in a decarbonised world.

Cleanaway Waste Management Limited (‘Cleanaway’ or the ‘Company’) is Australia’s largest waste management business. It owns and operates a network of 125 infrastructure assets that manage post-collection waste and operates a waste collection fleet of 5300 vehicles.

The business comprises three operating segments:

• Solid Waste Services – the largest solid waste and recycling services fleet in Australia, supported by the most extensive resource recovery and post collection facilities network across the country. 

• Liquids and Health Services – the largest hydrocarbons recycling business in Australia and a major player in the liquids market, collecting and processing mineral oil, hazardous liquids and healthcare generated waste streams. 

• Industrial and Waste Services – a wide range of plant and asset management services that provide solutions to reduce production down time, the risk of unscheduled plant stoppages and the reliance on labour.

Higher fuel costs and labour constraints to reduce FY22 second half result

Cleanaway estimates that second half EBITDA will be $15-$20 million lower than original forecasts, because of rising fuel costs and labour availability constraints. These challenges are compounded by one-off operational disruptions caused by the recent East Coast floods, resulting in property damage and the loss of vehicles and equipment. 

The impact of higher fuel costs is estimated at $10 million for the second half year while labour shortages related to the pandemic are negatively impacting Cleanaway’s ability to operate efficiently.Flood damage to the New Chum landfill site has resulted in its temporary closure, leading to an estimated $5-$7 million EBITDA impact in the second half year. Damage to post-collections equipment in Cleanaway’s Health Services business is likely to add temporary costs of $5-$7 million in the second half due to operational inefficiencies. 

On a positive note, Cleanaway has specific rise and fall clauses in its contracts that reference fuel, labour and CPI indices. However, it is the lag affect of these cost recoveries that has impacted the second half year performance. Input prices are adjusted at least annually, resulting in the lag on cost recovery. Insurance recoveries will indemnify Cleanaway for the loss of vehicles and equipment relating to recent flooding. 

The Future

Cleanaway’s earnings are diversified across 250 sites Australia-wide, and the Company delivers essential services to 130 Municipal Councils and 150,000 business customers, from more than 125 prized infrastructure assets. Its vertical integration through the waste value chain comprising collection, recovery, treatment, and disposal, provides a resilient and defensive earnings stream and recurrent cashflows from a strong credit-quality client base. 

Importantly, Cleanaway has embraced a low carbon future and has invested strategically in infrastructure assets and services platforms that transition the economy to a low carbon and high circularity environment. This irreversible trend is creating increasing demand for recycled content,improved land fill diversion and new waste streams. Cleanaway has the operational scale, geographical coverage, and proximity to key infrastructure to play a commanding role in a decarbonised world.

This unique market position is likely to underpin consistent earnings growth post FY22 as Cleanaway works through the one-off and short-term challenges currently facing the business. 

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.