CustomerConnect Implementation Will Improve Efficiencies And Customer Service By FY '28

Key Takeaways

• Strategic focus on operational excellence and strategic infrastructure investments aims to enhance margins and boost long-term earnings and revenue growth.
  
• High-value contracts and landfill gas processing present sustainable multi-decade growth opportunities, driving revenue and operational improvements.
  
• Decreasing cash flow, market challenges, and operational delays threaten Cleanaway Waste Management's revenue growth and profitability amidst tough industry conditions.

Catalysts

Provides waste management, industrial, and environmental services in Australia.

• Cleanaway's strategic focus on operational excellence and restructuring initiatives is driving margin expansion and is expected to deliver more than $50 million in benefits by FY '26, positively impacting net margins.
  
• The company's investment in strategic infrastructure, including the Western Sydney MRF and LMS joint venture, is set to support growth in EBIT by $5 million in H2 FY '25 and $10 million in FY '26, subsequently enhancing earnings.
  
• Cleanaway's focus on high-value Tier 1 resource contracts and the decommissioning, decontamination, and remediation (DDR) market presents a multi-decade growth opportunity, potentially boosting long-term revenue.
  
• The ongoing implementation of CustomerConnect, despite its delayed timeline, is expected to unveil efficiencies and customer service improvements, contributing $12 million in EBIT by FY '28, effectively enhancing revenue and earnings.
  
• Expansion in landfill gas processing through the LMS joint venture and improved ACCU revenue is designed to support sustainable operations and boost net margins over the coming years.

Cleanaway Waste Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cleanaway Waste Management's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.3% in 3 years time.
• Analysts expect earnings to reach A$291.5 million (and earnings per share of A$0.13) by about April 2028, up from A$156.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$244.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, down from 36.6x today. This future PE is greater than the current PE for the AU Commercial Services industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Cleanaway Waste Management Future Earnings Per Share Growth

Risks

• The company faces risks from market conditions in its Industrial & Waste Services segment, which is still experiencing challenging conditions from the previous year, potentially affecting the company's overall revenue growth.
  
• There is a noted decrease in net operating cash flow by 28.4% due to tax payments, which, although expected, results in lower immediate cash availability affecting liquidity.
  
• The recent fire at the St Marys facility poses a financial risk with estimated costs ranging between $20 million and $40 million, which could impact net earnings depending on insurance recoveries.
  
• Market competition in Metro C&I operations, alongside softer consumer activity, presents a challenge for maintaining revenue and managing operational costs, impacting net margins.
  
• CustomerConnect's delay, impacting the speed of expected operational efficiencies and cost savings, can result in deferred EBIT benefits, potentially affecting forecasted earnings growth.

Valuation

• The analysts have a consensus price target of A$3.053 for Cleanaway Waste Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.4, and the most bearish reporting a price target of just A$2.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$4.6 billion, earnings will come to A$291.5 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$2.57, the analyst price target of A$3.05 is 15.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.