Stock Highlight

It is expected that over the coming years the stock market will be more volatile than what we have experienced recently. Now is a good time to add companies which are better situated to survive in a volatile stock market.

Below are two companies which meet these criteria and are trading at a discount to their fair value.  

Cleanaway Waste Management Ltd (CWY)

CWY is currently trading at a discount of 22% from our fair value and paying a 2% return. Due to the nature of the company, it is more likely to weather economic downturns.

Business snapshot

CWY is a waste management company, operating a national network of collection, processing, treatment, and landfill assets from over 250 locations across Australia.

Investment view

CWY is the market leader in waste management in Australia through three key divisions, Solid Waste Services, Liquid Waste & Health Services, and Industrial & Waste Services. The essential service provider has implemented Blueprint 2030, a 14-point strategy focused on delivering incremental growth from waste infrastructure development and providing better waste outcome solutions for customers, building on prior initiatives (Footprint 2025) and acquisitions. In FY23, CWY will benefit from a full year contribution from Sydney Resource Network (SRN), acquired in Dec’21, which further accelerated the company’s NSW operations expansion. CWY’s competitive advantages include scale, client base, high barriers to entry, and licenses from relevant agencies.

Last major event

In Feb’23, CWY reported 1H23 revenue of $1.5bn up 20% on the pcp, whilst underlying EBITDA growth was ~18% higher to $322m. Overall performance was supported by an initial full period contribution from SRN and four months from GRL, offsetting unfavourable OCC pricing and disruption from QLD floods. High labour churn rate (~20%pa) remains a headwind for management, with ~1,700 roles filled YTD, but vacancies only reduced by ~101. Hence, CWY is focusing on decentralising and building our regional ‘Branches’ to counter the trend. Management have guided for underlying EBITDA of ~ $670m, including GRL, while EBIT is expected to come in at ~$300m (D&A ~$370m). Val maintained.

Ramsay Health Care Ltd (RHC)

RHC is currently trading at a 14% discount to our fair value and paying a 3% dividend. With an aging population in Australia health care is a growing sector. Although there may be some people opting out of health services, the majority will still need to access the services.

Business snapshot

RHC is a global hospital group operating over 220 hospitals and over 25,000 beds, with market leading positions in Australia, France, and Scandinavia. Additionally, they have a position in the UK.

Investment view

RHC provides exposure to a growing healthcare company, set to benefit from the expected increase in demand for private hospital services. RHC has expanded via a combination of organic growth and ongoing acquisitions, largely in Europe. RHC is positively exposed to an ageing demographic but offset by overextended Govt. budgets and Insurers looking to lower hospital stays. Over the longer term, we expect RHC to continue delivering above system growth driven by positive long-term demand drivers’ market-leading positions in Aus, France and Scandinavia; and a return to more stable regulatory tariff environments in the UK and France.

Last major event

In Feb’23, RHC reported an improved result as we move on from the pandemic. 1H23 revenue rose 13.6% vs pcp on the back of improved surgical activity levels across all regions, reflecting the decline in surgical restrictions and better management of COVID disruption. EBIT improved ~120% Q2 over Q1 with Feb seeing a return to positive momentum in surgical activity levels. Whilst the industry globally continues to be impacted by staff shortages and rising labour costs, RHC seems confident new initiatives will drive down vacancies in all regions. A further $179.2m was invested in brownfield, greenfield and growth projects seeking to meet future needs and improve efficiency. RHC expects further recovery through FY23 and into FY24. Val maintained.

Please contact us if you would like more information.

Articles | Stock Spotlight

March 29, 2023

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