It's fair to say that everyone wants to be as far away from waste as possible, except for Transpacific Industries Group Ltd (ASX: TPI). Transpacific Industries Group is Australia's leading provider of total waste management services, including collection, transportation and waste disposal. It caters to commercial/industrial and municipal clients through its Cleanaway and Transpacific Industrials divisions.
Over the past three months its stock price has plunged nearly 24%, driven by a negative earnings surprise on its FY14 results and a tragic fatality that led to the grounding of its entire fleet. The fact that this coincided with the recent negative market sentiment has compounded the damage. Thankfully for the company, its fleet returned to normal service within two weeks, and it looks like the company could be turning a corner as well.
There is no skirting around the fact that Transpacific has been an inconsistent performer over the last few years, recording significant losses in FY11 and FY13. However, strip back one-off charges and the underlying performance is quite good given the poor operating conditions – NPAT has more than doubled over the last four years. This has given the company the confidence to start paying dividends again.
In November 2013, Transpacific installed Robert Boucher as the new CEO, who brought with him over 25 years of experience in the waste management industry. Tasked with reinvigorating the company, he has decided to grow revenues by increasing market share on the group's core businesses in Australia and divesting the non-core New Zealand operations. The proceeds have been used to repay debt, which in conjunction with the decision to redeem outstanding preference securities on September 30 has significantly strengthened the balance sheet.
Not only will the newfound financial leverage aid in the pursuit of 'tuck in' acquisitions aimed at improving efficiencies and margins, it provides ample ammunition to invest in research and development. With greater focus on environmental sustainability, clients will increasingly look for innovative waste management solutions and this will favour larger companies who can invest heavily in research. Endeavours in this area will allow the company to maintain and potentially grow its market share.
Apart from renewed focus, new management has also sought to align itself with global best practices by appointing a specialised U.S. engineering firm to evaluate potential remediation liabilities on its landfill sites. This led to a one-off $189 million charge in the FY14 result and should hopefully mitigate further negative earnings surprises from remediation liabilities in the future.
Aside from these internal factors the company is also getting some relief on the macro front in the form of the falling AUD. This will provide a boost to the manufacturing and services sector, both of which are key clients of the waste management industry, making up nearly 40% of industry revenue per IBIS World. Further, per the September minutes the RBA still deems the AUD to be 'high by historical standards' so there is potentially a small chance of a rate cut, which would be a shot in the arm for the construction industry, which is another important client.
Should you buy?
Time will tell if the company has managed to clean up its act. In the meantime, it should be on your watch list and is potentially a bargain given it is trading near its 52-week lows.
