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Why Cleanaway Waste Management Ltd’s (ASX:CWY) share price hit a 3-week high as the ASX 200 goes into meltdown

You have to squint to see the stock rises on our market today but a small handful has managed to pull ahead amid the meltdown.

One of the standouts among the outperformers today is Cleanaway Waste Management Ltd (ASX: CWY) with the Cleanaway share price surging 5% to a three-week high of $1.77 on Thursday – making it the second-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) behind rare-earth miner Lynas Corporation Ltd (ASX: LYC).

The only other stocks among the top five list are gold miners such as Resolute Mining Limited (ASX: RSG), Regis Resources Limited (ASX: RRL) and St Barbara Ltd (ASX: SBM) thanks to a firming gold price on safe-haven buying.

A recommendation upgrade from Morgans probably explains the surge in interest in the stock as the Cleanaway share price had fallen around 20% from its August high before today’s big jump.

Morgans thinks the stock has not only been oversold but that the stock is cum-consensus upgrade and has lifted its rating on Cleanaway to “add” from “hold” as it bumped up its price target by 3 cents to $1.89 a share.

Cleanaway said at a recent conference that economies of scale following its acquisition of Toxfree Solutions have given the group an edge in terms of operating leverage and recurring revenue.

“In its August result briefing, CWY said it was comfortable with FY19 consensus EBITDA expectations of ~$450m (+32% on pcp) (currently $453m). We think this is conservative,” said the broker.

“Annualising 2H18 earnings, accounting for organic growth in the combined business and initial delivery of margin under major contract wins, and allowing for the start of synergy extraction delivers a 3-4% beat of this outlook.”

That may sound like a modest beat, but any upgrade to earnings in this market is a big win for a stock.

What’s more, Cleanaway’s business is relatively defensive and dependable and these are hotly sorted qualities that investors are looking for in the current climate.

Cleanaway has won a number of large contracts recently, including a seven-year contract with the City of Sydney starting in FY20 and the logistics component of the Queensland container deposit scheme.

Even if the stock traded at Morgan’s price target, it is still cheap when compared to international peers. Cleanaway would be trading on an enterprise value-to-earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 8.7 times when its largest US peers are trading on a multiple that’s closer to 11 times.

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Motley Fool contributor BrenLau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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