Strong Start To 2024; More Upside To Full-year Outlook Our Conclusion
We think GFL’s Q1 results highlight the following: 1) there is still upside to its
2024 guidance; 2) the company remains committed to its capital allocation
plan and hitting its 2024 leverage target; and 3) we are seeing the benefits of
GFL’s operational improvement strategy. We continue to argue that as GFL
executes against its plan, this will drive industry-leading earnings and FCF
growth and help close the valuation gap with its peers. We rate GFL an
Outperformer with a raised price target of $59 (from $58).
Key Points
More Upside To Full-year Outlook: GFL raised its full-year adj. EBITDA
guidance to $2,230MM ($2,215MM previously) but maintained the rest of the
metrics. Looking at the guidance raise, though, it just reflects GFL’s Q1/24
outperformance so there should be more upside to its 2024 EBITDA target
(GFL had guided to $440MM in EBITDA in Q1/24 but printed $455MM).
Taking the implied seasonality from GFL’s original Q1/24 guidance and
applying that to the actual first-quarter earnings would infer a full-year
EBITDA closer to $2.3B. While we recognize GFL will wait to provide a more
fulsome update with Q2/24 results given the impact of weather that can shift
some volumes between Q1/24 and Q2/24, we remain optimistic that the
company is tracking nicely above its 2024 target even before taking into
account its recent acquisition spend.
We would note that in addition to pricing outperforming (in Q1, pricing was
7.7% versus guidance of “low 7s”), the company was baking in RINs and
commodity pricing similar to Q4/23, which was US$3.09 and US$93.33/t.
Spot prices are tracking above these levels; RINs pricing was US$3.20/t and
OCC pricing for April was US$101.39/t. This suggests upside from higher
commodity prices versus what is baked into GFL’s current guidance.
Furthermore, GFL has spent ~$500MM of its $600MM-$650MM of planned
M&A budget already. This will likely contribute ~$40MM of EBITDA on an
annualized basis, or ~$30MM in 2024. The additional $100MM-$150MM in
M&A spend would be incremental to this. Putting this all together, GFL looks
to be positioned to exceed its original 2024 EBITDA guidance of $2.215B by
~$100MM. We have not increased our estimates by this magnitude to build
in some conservatism into our forecast.
Committed To The Capital Spend Plan: GFL reiterated its commitment to
its capital plan, which is normal capex of $850MM-$900MM with incremental
growth capex of $250MM-$300MM and $600MM-$650MM of M&A spend.
With the company having spent 75%-80% of its M&A budget, the common
question we often hear is whether GFL will expand its capital envelope.
Management was clear on the call that it has no intention of doing that. It
continues to focus on reducing its leverage ratio to 3.65x-3.85x exiting 2024,
down from 4.14x exiting 2023. As GFL continues to drive its leverage ratio
closer to peer levels (~3x), we believe this will help close the valuation gap
between it and the other publicly traded waste names. GFL is trading at
10.8x forward EBITDA versus RSG and WM at ~14x and WCN at ~16x