By Jason Fittler
TPI provides integrated industrial cleaning and total waste management solutions to customers across Australia and New Zealand, with a particular focus on the liquid and hazardous segments of the waste management market.
Its acquisitions of Baxter, WAM and Cleanaway have provided Transpacific with a significant footprint in the solid waste disposal market across Australia and New Zealand. Transpacific is also a key player in the heavy-duty commercial vehicles industry in Australia and New Zealand, and has niche operations in parts of Asia.
However, the significant debt burden created by its past acquisitions recently forced Transpacific into a lengthy recapitalisation process, which included WP Holdings (a subsidiary of large US private-equity firm Warburg Pincus) taking a large cornerstone stake in the company.
At bottom-of-the-cycle, with no financial commitments for the next few years (refinancing or acquisitions), we see minimal downside risk to TPI’s earnings from here.
We continue to believe that Warburg Pincus will drive better corporate governance, financial discipline and integration of the Group, which should deliver value over time.
Whilst short-term macro headwinds remain, at $1.35, TPI looks excellent value for the longer term, when improved macro conditions should provide for strong earnings upside.
It is not all good news for the company but the worst certainly seems to be behind them now.
The company is not paying a dividend and I would not expect to see any until 2012. But they are repaying over a Billion dollars in debt and are a key player in a necessary industry sector.
It is expected that 2010 will be a slow year in the industry, whilst the A$ has strengthened, Commercial Vehicles remains slow due to unavailability of finance for customers. A weak construction market continues to constrain collection and landfill volumes, whilst the subdued mining sector is affecting Industrial Services.
We have tapered our 2010 earnings forecasts by 5% on last year. Potential upside to our earnings forecast is from stronger recycled commodity prices, a pick up in the NZ economy and stronger NZ$, and a return to normal activity in high-margin sectors such as mining and construction. Whilst we expect these swing factors to materialise, it is a question of timing. Our forecasts assume activity will return to “normal” in 2011.
This is a core holding in long term portfolios, although this company will take time to turn I fully expect in the next 5 years this stock will out perform. We are looking for growth of 57%, keep in mind a couple of months ago this stock was targeted to fail, now with the corner stone investor I would expect to see the stock make a full recovery.
At the peak of the market TPI trades at $11 per share, although I do not expect to see this level again for quite some time, I would expect to see the price improve as they sort through their debt levels over the coming years.
This is not a stock to go to heavy on but one which everyone should look to have some exposure into.
PS. For more information on Transpacific Industries (TPI) please call us on 07 4771 4577.