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This ASX 200 company is the latest to score a “buy” upgrade from a top broker

The Cleanaway Waste Management Ltd (ASX: CWY) share price is the second-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index this afternoon after Credit Suisse upgraded the stock ahead of its investor day on Thursday.

The CWY share price surged 6% to $1.85 and is only beaten to the top spot on the leader board by the Ausdrill Limited (ASX: ASL) share price, which is up 6.1% at $1.51 at the time of writing.

Other notable outperformers today include the Orocobre Limited (ASX: ORE) share price, the Domain Holdings Australia Ltd (ASX: DHG) share price and the Pact Group Holdings Ltd (ASX: PGH) share price.

The outperformance is particularly pleasing as just about every sector on the market has fallen into the red with the top 200 stock benchmark shedding 0.6% of its value.

One factor behind Credit Suisse’s decision to up its recommendation on Cleanaway to “outperform” from “neutral” is the New South Wales container deposit scheme.

“CWY’s NSW container deposit scheme beats expectations, with 900 mn containers recovered this year already (2018),” said the broker.

“We expect ~1.8 bn containers to be recovered next year (~50% of all eligible containers sold in NSW). This provides a high-quality source of recycled plastic and there are attractive opportunities for CWY to vertically extend into plastic pelletising or converting plastic back into oil.”

Another potential tailwind is the rising recycled cardboard prices. Since the company’s full-year results announcement in August, the price of recycled cardboards has steadily improved with Credit Suisse noting that prices of imports from Japan are up 15% while those from the US and Europe are up 5%.

Cardboard constitutes around 40% of Cleanaway’s commodity revenue.

There is also a chance that management could pleasantly surprise the market on the synergies front following its takeover of Toxfree Solutions.

Cleanaway is targeting synergies of $35 million by FY21 and investors will be keen to get an update now that management has had more time to bed down the acquisition.

Credit Suisse has increased its price target on the stock to $2.05 from $1.90 a share.

But the stock is not without risks. The broker points to higher competition in the domestic market, the decline of recycled commodities prices, weaker economic conditions, poor municipal contract renegotiation outcomes and Toxfree integration risk as some of the factors that could derail the stock.

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Motley Fool contributor Brendon Lau 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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