Medium-Term Growth Prospects Remain Bright for Cleanaway Despite Soft Start to Fiscal 2020

Despite a weak start to fiscal 2020, our long-term expectations for no-moat Cleanaway are unchanged. Our AUD 1.70 per share valuation is also unchanged following today’s trading update which highlighted soft year-to-date volumes in fiscal 2020. We now forecast flat waste volumes for Cleanaway in fiscal 2020, down from prior expectations for growth of 1.4%, before volume growth rebounds to 1.4% in fiscal 2021. Accordingly, we’ve reduced our full-year fiscal 2020 EBIT forecast by 4% to AUD 251 million, reflecting moderated volume assumptions in this fiscal year. Nonetheless, our longer-term expectations for Australian waste volumes remain unchanged, with population growth and increased per capita waste generation rates to drive waste volumes higher. We expect waste volumes to grow at an unchanged average 1.2% annually over the fiscal 2021--fiscal 2029 period. Therefore, we continue to expect robust medium-term earnings growth, owing to substantial operating leverage, the delivery of further synergies from the Toxfree acquisition and a resumption of modest growth in Australian waste volumes in fiscal 2021 onward. Our five-year EBIT CAGR estimate of 8.7% is largely unchanged. Investors sent Cleanaway shares sharply lower following the trading update. While shares now appear less rich--last trading at an 8% premium to our fair value estimate--margin of safety remains absent at current share price levels. We recommend awaiting further weakness before considering a position in the name.