Eight Capital Eight Capital’s Jamie Somerville is taking a “neutral” stance on Canada’s waste and recycling industry despite expecting it to “continue to generate above average returns on investment.”
In a report released before the bell, the equity analyst initiated coverage of GFL Environmental Inc. , Secure Energy Services Inc. and Waste Connections Inc., touting their “remarkable success in recent years, by pursuing strategies of steady consolidation and operational enhancement with a focus on stakeholder relations, supporting high returns on investment.”
“We expect the waste & recycling sector to continue to generate above average returns on investment, and given the stable, low-risk, and growing nature of these businesses, we view these companies as important core holdings in a diversified equity portfolio,” he said. “However, large-cap waste management stocks are trading at relatively high valuations, compared to both historic norms and the wider market. As a result, we note a possibility of multiple compression leading to occasional periods of share price performance that is only in line with, or below, the market average.”
Citing its “attractive relative valuation, with significant re-rating potential, as well as balance sheet strength, operating margins, technical factors, and growth potential,” Mr. Somerville named Secure Energy his “top pick” and gave it a “buy” recommendation and Street-high $20 target. The average is $14.58.
“We expect the company’s focus on the energy industry in western Canada will serve it well over coming years, but note this focus also creates concentration and perception risks, relative to other waste management stocks,” he said.
Mr. Somerville also gave a “buy” rating to GFL with a $70 target (matching the Street high), while he gave WCN a “neutral” recommendation and $270 target. The averages are $55.86 and $269.28, respectively.
“Waste Connections (WCN-T) has a very strong long-term track record of creating value for all its stakeholders since its founding in the late 1990s, thanks to a very high-quality corporate culture that underpins our expectation for continued success,” he said. “We are similarly optimistic that GFL Environmental (GFL-T) can continue its slightly shorter (founded in 2007) but similarly impressive growth and value creation track record. GFL likely has slightly more growth potential than WCN, an aggressive acquisition strategy coupled with a potential rationalization event and deleveraging catalyst, as a result of which we wouldn’t be surprised to see GFL outperform over the next 12 months. However, meaningful profitable growth through acquisitions becomes increasingly difficult with size, and valuation for WCN in particular already appears to have priced in reasonable growth expectations, without overly discounting for risks.”