Key Takeaways From Investor Meeting With GFL Management Our Conclusion
We had the opportunity to host GFL’s management team as part of our CIBC
Spring Industrial Tour. With us from the company were Patrick Dovigi,
Founder and CEO, and Hamzah Mazari, EVP, Chief Strategy Officer and
Head of Investor Relations. A focus of our discussion was around the media
reports related to GFL pursuing a transaction to maximize shareholder value.
We provide our key takeaways from our meeting. We rate GFL an
Outperformer and take up our price target to $62, from $59.
Key Points
How Did We Get Here? It is clear GFL is frustrated by the investor
skepticism around its ability to both grow earnings/FCF and de-lever. As we
noted in our May 20 Transportation & Aerospace Weekly titled Putting
GFL’s Recent Share Price Performance In Perspective, we often hear the
same pushback on the name – concerns over its leverage. A telltale sign of
this is that despite GFL having laid out its capital allocation strategy for 2024
on November 29, 2023, the company has been asked on its two subsequent
earnings calls whether it is committed to staying within these boundaries.
The implication is that GFL could raise its capital allocation budget, and it
could then miss its leverage target goals for this year. GFL has been clear
that it remains committed to the financial targets it has laid out for 2024. This
makes GFL a show-me story to some investors. We would argue, though,
given where the shares were trading, the company’s valuation was being
overly penalized (its EV to forward EBITDA spread had widened out to two
standard deviations versus the average of the Big 3 waste names before this
week). We also believe the company’s strategy to narrow/eliminate some the
KPI gaps between it and its main peers remains on track. In a GFL note we
published last year titled The Path To $1B+ In FCF Has Been Laid, we
made the case that the foundation to achieving $1B+ in FCF in 2025 has
already been laid and the path to a step-up in FCF has been significantly de-
risked. Given our positive long-term outlook on the solid waste industry and
GFL’s company-specific earnings levers, the company is positioned to drive
industry-leading earnings/FCF growth.
What Are The Options Available? There are four options available to GFL:
the status quo, pursuing a sale of Environmental Services (ES), pursuing a
transaction for the whole business, and private equity taking out the existing
private equity investors with GFL staying public. We would note GFL has
shown it is open to evaluating its operations and options in an effort to
maximize shareholder value, as evidenced by its divesture of $1.65B of assets
last year, and spinning out GIP. It also made a smaller asset sale in Michigan
a few weeks back. We believe that GFL is open to evaluating potential offers
that maximize the value of its portfolio. We view the status quo and selling ES
as higher probability outcomes versus the latter two. One issue we would
highlight, if private equity were to acquire all of GFL, is the size of the IPO
looking out five to seven years. Over this time frame, GFL’s EBITDA could be
$4B+ which would imply a $55B+ EV using a comp waste multiple.