Cleanaway Waste Ltd (ASX: CWY) is Australia's leading waste management service, offering solutions to both businesses and governments as well as households. They dominate the collection and processing of waste materials, with a network of almost 4000 vehicles operating from 250 locations.
What's behind this recent surge?
The recent gains in the Cleanaway share price has undoubtedly been spurred by the company's phenomenal half year results. The six months to December 2018 saw net revenue grow by 47.4% compared to the prior corresponding period. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) and net profit after tax (NPAT) followed suit, with growth of 43.2% and 35.1%, respectively.
The strong performance across all segments has been led by contribution from its Toxfree acquisition in May 2018. In particular, its industrial and waste services saw a 129% boost in revenue, with EBIT margins strengthening from 2.6% to 5.9%. The management team reaffirmed their confidence in "delivering $35 million of synergies", with much of the benefits such as IT integration and group procurement expected to continue through FY20.
Along with Cleanaway's acquisitions, the strong performance is supported by growth in solid waste services – most noticeably the contracts won with NSW Central Coast Municipal, Coles, and the Brisbane City Council. New facilities have also been built in Western Sydney, Perth and Melbourne in order to meet demand for waste processing.
Sustainability and innovation
Changing global conditions have also allowed Cleanaway to gain a competitive advantage in their waste disposal. China's new National Sword Policy has limited the import of low-grade plastics and contaminated materials from overseas markets. Traditionally, selling waste materials to China has helped to subsidise the cost of waste processing in not only Australia, but in countries all over the world such as the United States (US), Germany and Ireland. By viewing waste as a commodity and investing in advanced waste management technologies, Cleanaway has been able to thrive by innovating their recycling and non-landfill alternatives.
Should you invest?
At the current price-to-earnings (P/E) ratio of 34, I'd say that the stock is already priced for perfection. While its Toxfree acquisition has helped to solidify Cleanaway's position as the industry leader, I'm not convinced that there is enough growth to justify the lofty premium that the Cleanaway share price currently trades on. However, Cleanaway may be of interest for investors seeking a more defensive earnings profile, as waste management is an industry that is likely to hold strong during an economic downturn.
