Renewable Strategies And Tactical Divestitures Propel Growth And Financial Resilience

Key Takeaways

• GFL's strategy of focusing on recycling and renewable natural gas is driving revenue and earnings growth through disciplined pricing and operational efficiencies.
  
• The company aims to improve its financials by leveraging asset sales for debt repayment and stock buybacks, enhancing EPS and reducing leverage.
  
• GFL faces risks from fluctuating commodity prices, potential tax implications of segment sales, market volatility, extreme weather events, and strategic financial uncertainties.

Catalysts

Offers non-hazardous solid waste management and environmental services in Canada and the United States.

• The company has achieved a significant 20% adjusted EBITDA growth and substantial margin expansion, reaching 31.1% in Q3 2024, driven by disciplined pricing and operational efficiencies, likely impacting net margins positively.
  
• GFL's capital allocation strategy includes deploying $900 million in M&A and incremental growth investments in 2024, with a focus on recycling and renewable natural gas (RNG) infrastructure, expected to drive revenue and earnings growth.
  
• The anticipated sale of the Environmental Services segment is expected to yield a minimum of $6 billion in after-tax proceeds, with plans to repay $3.5 billion in debt and use remaining proceeds for stock buybacks, potentially improving earnings per share (EPS).
  
• New EPR-related contracts and RNG facilities are anticipated to contribute significantly, adding $35 to $45 million and $25 to $30 million in EBITDA, respectively, by 2025, enhancing revenue and EBITDA.
  
• Leverage reduction efforts have improved the net leverage ratio to 4.05, the lowest in GFL’s history, which alongside expectations for further deleveraging, is set to enhance the company’s credit profile and potentially reduce interest expenses.

GFL Environmental Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GFL Environmental's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.6% today to 5.9% in 3 years time.
• Analysts expect earnings to reach CA$564.1 million (and earnings per share of CA$1.24) by about November 2027, up from CA$-585.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 60.7x on those 2027 earnings, up from -42.2x today. This future PE is greater than the current PE for the CA Commercial Services industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 5.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

GFL Environmental Future Earnings Per Share Growth

Risks

• GFL's exposure to fluctuating commodity prices poses a risk to revenue and margin forecasts, as seen with lower than expected commodity and fuel prices affecting third-quarter revenues.
  
• The potential tax implications of the Environmental Services segment sale, which have increased with the rising enterprise value, could impact net proceeds and the ability to effectively deleverage, affecting net margins and earnings.
  
• The continued pressure on used motor oil pricing within the Environmental Services segment presents a revenue and margin headwind due to persistent market volatility.
  
• Uncertainties around the final valuation and terms of the Environmental Services segment sale could affect GFL's strategic financial plans, including debt repayment and share buyback initiatives, potentially impacting overall earnings and capital structure.
  
• Potential operational disruptions due to extreme weather events, like hurricanes, pose ongoing risks to operational continuity and could affect revenue streams, particularly in the company’s operations in the U.S. Southeast.

Valuation

• The analysts have a consensus price target of CA$61.68 for GFL Environmental 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 CA$75.0, and the most bearish reporting a price target of just CA$39.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$9.6 billion, earnings will come to CA$564.1 million, and it would be trading on a PE ratio of 60.7x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$62.8, the analyst's price target of CA$61.68 is 1.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.