A transformational year for Bingo
Originally written by Eiger for Livewire.
Bingo Industries has reported a 1HFY20 underlying EBITDA and NPAT of $82m (+75% vs pcp) and $28m (+32% vs pcp) respectively. Guidance for the FY20 full year was unchanged and underlying EBITDA is still expected to be in the $159m-$164m range (excluding the $3.2m gain on property sale). The result was in line or slightly ahead of expectations with consensus EBITDA prior to the result based on Factset data at $77.3m. However, the result did include a profit on the sale of property which would reduce the underlying EBITDA to $78.8m or 2% ahead of consensus expectations.
What we liked in the result:
- The revenue growth in collections of 21% on margins that were stable at 19%. This included significant growth in commercial and industrial waste which is a new-ish area for Bingo.
- The significant increase in margins in post collection (landfill and recycling) which came on the back of price rises that were implemented in 2019.
- The significant progress the company continues to make integrating DADI and the opportunities the vertical integration offers the company in the long term
- The increased focus on zero harm targets and a commitment to adhere to Modern Slavery Compliance standards.
What we didn’t like:
- Overall revenue was lower than expected. The company went for margin over growth in post collections. It seems likely that that there will be bigger focus on volume in 2HFY20.
- Based on expectations being met by a small margin we believe that Bingo is fairly valued at current levels.
The transformation of Bingo Industries
Bingo Industries has changed significantly since the release on the 1HFY19 a year ago. Between then and now the company acquired the operations of Dial a Dump (DADI) which included the significant landfill and recycling centre at Eastern Creek in Sydney and a significant number of waste transfer stations in NSW. As part of the acquisition the company also agreed to divest a site at Banksmeadow in Sydney which occurred during 2019.
Subsequent to balance date the company has noted that its Western Sydney Patons Lane recycling centre has commenced operations and that its West Melbourne recycling facility has received approval to move to 24hr operations. The company also noted that market conditions in residential construction continue remain challenging.
Bingo Industries is part way through integrating the transformational acquisition of DADI. The key to improved share price performance from current levels in lifting the current post acquisition ROCE from the 9.2% delivered in 1HFY20 to the stated medium-term target of 15%.
Where to from here?
The company’s immediate target is delivering guidance for FY20 and lifting EBITDA in FY21. Key factors highlighted today that could assist in delivering this include:
- Expanded operations at Eastern Creek following the completion of the expanded recycling facility later this year.
- Fully year contributions from the new Patons Lane landfill and Mortdale collection facility
- Upside from proposed increases to land fill levies in Victoria which have significantly lagged those in NSW and SA.
- Continued organic growth in commercial and industrial waste and area where Bingo is under represented.
- Entry into the Queensland market.
- A cyclical recovery in the residential construction market to complement the ongoing volume from infrastructure construction.
Over the long term, key drivers that will help the company achieve the targeted 15% ROCE include:
- The realisation that recycling rates in Australia must improve.
- The ban by China on the importation of semi-sorted waste that was likely to have been hand-sorted using very low wage employees has highlighted this problem. In the aftermath of this ban two private recycling centres (one in each of VIC and NSW) have gone into liquidation.
For Australia to achieve a Circular Economy in waste we expect that the Federal Govt will shortly announce ambitious new recycling targets that will include:
- Banning the export of waste plastic, glass and tyres; and
- Using the Federal and State procurement budgets to focus on the utilisation of recycled material and mandate the use of recycled material in new developments.
Overall, we believe that Bingo Industries has a good combination of assets to take advantage of the ever-increasing focus on recycling and higher standards in the Australian waste industry. We believe that it is fairly valued at current levels having significantly re-rated over the last 12 months.
Author: Stephen Wood, Principal and Portfolio Manager