Stock Report | Bingo Industries Ltd

Bingo Industries Ltd (ASX: BIN) | BUY

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By M3 Equity Research

Investment Summary

  • VIC acquisition to drive the next leg of growth
  • Significant organic growth opportunities driven by infrastructure and regulatory tailwinds
  • QLD market presents upside risk

Ticker | ASX:BIN
GICS Sector | Industrials
Current Price | A$2.00
12m Target Price |  A$2.80
Upside | 40%
Market Cap | A$675m
P/E (TTM) | 32.25x
P/E (Forward) | 15.24x


BUSINESS DESCRIPTION

Bingo Industries Ltd. is a building & construction company. The company provides clients with various solutions for liquid waste such as oily waters, grease traps, wash waters and chemicals. Bingo is a leader in the Building & Demolition (B&D) waste collection and processing sector which includes demolition and construction of residential and commercial building projects, infrastructure projects and the DIY market throughout NSW and VIC. It also has an expanding presence in the Commercial & Industrial (C&I) waste management sector, mostly from commercial businesses, individual sites and Government and education.


INVESTMENT THESIS

Victoria Acquisition to drive next leg of growth

  • BIN has recently acquired 3 Victorian waste collection and post collection businesses for $38m, including $8m in growth capex.
    • This will be BIN’s first exposure to the Victorian market
    • This acquisition is expected to generate $8m p.a. EBITDA as well as 20% of synergies.
  • The key upside risk is opportunity for margin expansion
    • CCZ Equities estimates that current EBITDA margins at the Victoria operations are 20%, whilst the NSW business stands at 30.6%
    • Increased scale and more efficient trucking routes between the 3 waste collection and 2 recycling centres could provide margin lift
    • Also plans to replace existing recycling centres with new automated centre on nearby vacant land (that came with acquisitions)
    • Management envisions margins to become similar to NSW business within 2-3 years
  • Synergies expected to come over the next 3-6 months

Organic growth opportunities driven by infrastructure and regulatory tailwinds

  • Infrastructure spending boom
    • Federal Government infrastructure commitment of $70bn over the next 10 years
    • NSW Government infrastructure commitment of $73bn over the next four years
    • $74bn VIC state capital projects underway in 2017-18 with an additional $9.6bn p.a. over the next four years
  • Strong exposure to these trends
    • Contracted on North Connex and West Connex
    • Diversified client portfolio allows for broad-based exposure
  • Government regulation in favour of diversion of waste (recycling) rather than landfill
    • Minimum recycling requirements favour BIN -> industry leading recycling rates of 75%
      • Makes it harder for smaller firms without high quality recycling facilities
    • Recent upgrades and new facilities increase volume capacity to capitalise on these favourable regulatory trends
      • Acquisition of Wollongong and Revesby recycling centres -> BIN can now re-process 5 of the 14 waste product streams it collects and diverts most others from landfill
  • FY18 EBITDA guidance of $81.6m also reiterated
    • Including the acquisitions since IPO, EBITDA guidance of $89m
    • High likelihood to beat given that price increases of 5% were put through at start of July with little change in volumes according to management

Upside risk from Queensland market

  • Prospect of a new landfill waste levy is strong
  • Current industry practice for companies to truck NSW waste across border to dispose in QLD landfill because it is cheaper
    • BIN currently lobbying for a landfill fee to increase the cost of this practice and thus incentivise more recycling and re-processing of waste

KEY METRICS

Total Revenue ($) | 209.7m
Forward EPS Growth |
21%
Dividend Yield (%) | 
0%
Beta | 
N/A
12 Month Momentum | 
22%
P/E (NTM) |
15.24x
EV/EBITDA (NTM) |
9.02x
ROE (%) |
26.6%
EBITDA Margin (%) |
28.4%
Nebt Debt/Equity (%) |
17.9%


INVESTMENT RISK

Integration Risk

  • Integration risk is also at issue here and a failure to realise synergies and/or leverage new capabilities would dampen EPS accretion.
  • Management has so far shown strong capability in integrating acquisitions
    • 14 acquisitions since 2013 and shown ability to grow revenues significantly at each acquired facility
  • Risk lies in costs of upgrading acquired facilities, with a potential for a capex blow-out

Increasing Competition

  • Leader in the Building and Demolition segment (25% market share), but the Commercial and Industrial segment is hotly contested
    • Key competitors include Cleanaway Waste Management, Veolia Environmental Services and Tox Free Solutions
    • But only 25% of revenues generated from the C&I segment
  • Industry is fragmented, top 6 players only make up 35% of market share and this provides M&A opportunities for both BIN and its competitors
    • Since scale is heavily important in this industry, BIN would be adversely affected by transaction activity by competitors

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