Although 2020 has only just started and many will still be readjusting to work life, the sooner you look at your investment goals for 2020 the better.
One area I believe to have a strong tailwind in 2020 is the waste management sector. Thanks to an increasing population, growing waste and a move to handle waste onshore this sector should see continued growth. Two of the largest operators in this space are Cleanaway Waste Management Ltd (ASX: CWY) and Sims Metal Management Ltd (ASX: SGM).
Of these 2 shares, I think it’s worth taking a closer look at Cleanaway Waste thanks to its recent growth, increasing profit and rising dividend, which stands in contrast to Sims’ decline in profit, reduction in dividend and forecasted loss for 1H20.
What does Cleanaway Waste Management do?
Cleanaway is Australia’s largest waste management company and 1 of the top 20 largest waste management companies in the world, thanks to its 2018 acquisition of Tox Free Solutions and its 2019 acquisition of SKM Recycling group. Cleanaway offers waste, recycling, industrial and liquid services across more than 300 locations around Australia, employing over 5,900 staff.
In its FY19 report, Cleanaway posted a 33.2% rise in revenue. This was accompanied by an increase of 42.8% in underlying net profit after tax (NPAT) and an underlying earnings per share rise of 30.2%.
Cleanaway’s business breaks down into 3 segments: solid waste and recyclables, industrial and waste, and liquid waste and health services.
Its largest segment is the solid waste and recyclables services, which accounts for over half of its revenue and posted a net revenue increase of 23% over the prior year. Net revenue for its industrial and waste services grew 84%, and liquid waste and health services saw its net revenue rise by 53%.
Overall, the company’s growth is attributed to a combination of organic growth and the acquisition of Toxfree Solutions. Removing the bias of this acquisition, organic earnings before interest tax depreciation and amortisation (EBITDA) and revenue growth was cited as 6.4% and 12.7%, respectively.
Pleasingly, the company’s EBITDA to revenue margin also increased slightly to 21.9%.
With management confident in the future growth of the company, Cleanaway has also been growing its dividend, increasing the prior year’s total dividend by 42%. This amounts to a trailing grossed-up yield of 2.4%, which is below the market average, however it represents an underlying payout ratio of a little over 50%. This leaves the rest to be invested by the company in future growth.
Cleanaway is continuing to strengthen its network of infrastructure assets and also operates in a somewhat recession-proof industry, thanks to the demand for waste services being constant throughout all economic cycles.
I believe Cleanaway could beat the market in 2020 and over the longer term thanks to these tailwinds and growth, however, Cleanaway shares don’t come cheap and are currently trading on a price-to-earnings ratio of around 35 at the time of writing.
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Motley Fool contributor Michael Tonon owns shares of Cleanaway Waste Management Ltd. 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.