Waste Connection | From trash to treasure
admin | March 13, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
With the equity indices all down sharply over the last month and the Bloomberg Barclays Us corporate index hitting a year high recently, nothing seems insulated from the fallout of COVID-19. Relative safe havens such as packaged food have seen widening of 50 bp or more in the 30-year part of the curve. Waste collection servicers may prove to be the fallout shelter, in particular, WCNCN.
In recent days, WCNCN equity was relatively flat year-to-date. Furthermore, its 30-year bond, which priced on March 4 at +150 bp, is only out about 10 bp since pricing. Over the same time frame, Waste Management (WM), one of WCNCN’s closest peers, has witnessed roughly 37 bp of widening in its 30-year bond.
Exhibit 1: Waste Services Peer Comparison
Source: Company Filings; APS
WCNCN boasts the strongest margins in its peer group, which reflects the company’s strategy of focusing on secondary markets where population growth is higher and competition is limited. Currently 70% of WCNCN’s top line comes from commercial and residential markets, which are not as cyclical as industrial markets. Exclusive contracts from these markets account for more than 40% of WCNCN’s top line. This enables the company to maintain pricing power without the risk of increasing customer churn. WCNCN has maintained pricing growth above the rate of inflation, leading to solid margin growth. At year end 2019, WCNCN’s EBITDA margin was 32.1%, which compares favorably to WM’s EBITDA margin of 29.9% and Republic Services (RSG) margin of 28.7%. Drilling down to the free cash flow line, WCNCN’s free cash flow/sales ratio was a strong 16.2%, nearly 300 bp above WM’s ratio and more than 500 bp better than RSG’s. From 2016-2019, WCNCN’s revenues have increased 59.6% while free cash flow grew 94.1%.
Managing leverage for growth
WCNCN manages leverage in the 2.5x-3.0x range. The company has noted on multiple occasions that this leverage metric provides for strong investment grade ratings as well as flexibility to pursue acquisitions for growth. Given that the waste services business is highly fragmented, acquisitions are typically of the tuck-in nature. Management’s commitment to IG ratings is underscored by its common practice of reducing share buybacks to build cash on the balance sheet for acquisitions.
WCNCN ended 2019 with leverage of 2.4x. While the company has tapped the debt market twice in 2020, a 10-year issued late January ($600 million) and the aforementioned 30-year ($500 million), both deals were used to repay outstandings under the credit facility and its term loan. That said, both deals were essentially leverage neutral. While no filings have been released since the deals launched, as of 12/31/19 $916 million was outstanding under the revolver and $700 million under the term loan. The revolver should be largely repaid, and just over $500 million is outstanding on the term loan.
At a time like this when liquidity is very valuable, WCNCN’s liquidity is quite strong. Assuming the revolver is fully repaid, that leaves roughly $1.45 billion of availability after slightly more than $100 million of LOCs. Add to that the $327 million of cash on the balance sheet, and that puts liquidity at $1.77 billion. WCNCN’s debt maturity profile is very manageable with nothing maturing this year and $225 million maturing through 2022. The term loan comes due on 3/28/23 and WCNCN has done a good job so far repaying it. The initial tranche size was $1.64 billion and we estimate that just over $500 million is outstanding. Furthermore, WCNCN should generate nearly $1 billion of free cash flow this year. While WM’s cash position is a strong $3.56 billion currently, we note that a majority of the cash will be used to fund its acquisition of Advanced Disposal Services which is expected to close by the end of 1Q20.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.