A very quiet BB. Surprised at the drop today but picked up a few near the close. GLTA
The risk-reward proposition for GFL Environmental Inc. is “looking increasingly favourable,” according to BMO Nesbitt Burns’ Devin Dodge, who thinks its 2024 guidance “appears conservative.”
He was one of several equity analysts on the Street to raise their forecast and target price for shares of the Vaughan, Ont.-based water management company following the late Tuesday release of its quarterly results and full-year forecast.
“In our view, the combination of robust industry fundamentals, self-help opportunities, and strong growth prospects should allow GFL to generate earnings/FCF growth above its peers over the next several years,” said Mr. Dodge. “While elevated leverage remains a sticking point for some investors, we believe there is improving visibility for GFL achieving an investment grade rating within our forecast period. Meanwhile, the multiple discount to peers is at/near the widest level since the IPO, which we believe presents a particularly attractive entry point into the stock.”
While GFL expects adjusted EBITDA to rise more than 10 per cent year-over-year to US$2.215-billion this year, Mr. Dodge thinks “there are multiple layers of conservatism embedded within the initial outlook including upside risk to the price-cost spread, commodity values (assumed consistent with Q4/23 levels, or approximately 10 per cent below current prices), contributions from RNG projects coming online in H2/24, and incremental M&A.”
“Management reiterated its 2024 capital allocation priorities for base capex ($850-900-million), incremental growth investments ($250-300-million), and M&A ($600-650-million),” he added. “However, we suspect there may be an emerging upward bias to these targets. GFL reached an agreement to acquire an integrated solid waste business in the U.S. Southeast that is expected to consume more than 50 per cent of its 2024 budget for acquisitions. Management also indicated additional EPR-related contracts are likely to be awarded in the coming months that we suspect could raise its incremental growth capex for 2024 and/or extend the elevated spending into 2025. While these are attractive opportunities and improve the long-term prospects for the business, they are likely to make the glide path for reducing financial leverage slightly shallower.”
Maintaining an “outperform” recommendation for GFL shares, Mr. Dodge increased his target to US$42 from US$40. The average is US$41.77.
Others making adjustments include:
* Scotia’s Michael Doumet to $57 (Canadian) from $47 with a “sector outperform” rating.
“In our view, GFL’s 4Q23, 2024 guidance, and 2024 capital allocation strategy was effectively in-line with our/Street expectations and prior management commentary,” he said. “While in-line with expectations, we believe (and management confirmed) there are ‘multiple points’ of potential upside to the 2024 guide.
“GFL reduced its net debt leverage from 5.0 times to 4.1 times in 2023 (including 0.3 times from its U.S. divestiture). In 2024, GFL plans to limit M&A to delever more quickly, meaning 2024 may represent a ‘transition’ year, in that less-than-normal growth will be achieved. We expect that to change in 2025 as profit growth from favorable price/cost spread, RNG, and EPR will provide GFL with more room to ramp M&A spend, while also delevering the B/S to achieve investment grade rating in the M-T. Combined, we believe GFL is accelerating its route to optimizing FCF in the M-T.”
* ATB Capital Markets’ Chris Murray to $63 from $60 with an “outperform” rating.
“We see management’s commitment to deleveraging and effectively working the waste industry playbook, moving valuations toward peer levels,” said Mr. Murray.
* National Bank’s Rupert Merer to $56 from $55 with an “outperform” rating.
* CIBC’s Kevin Chiang to $58 from $57 with an “outperformer” rating.
* Jefferies’ Stephanie Moore to US$46 from US$40 with a “buy” recommendation.