On today’s Breakouts report, there are 71 stocks on the positive breakouts list (stocks with positive price momentum), and 19 stocks are on the negative breakouts list (stocks with negative price momentum).
While energy stocks continue to dominate the positive breakouts list, a waste collection stock, Waste Connections Inc. (WCN-T), surfaced on the positive breakouts list with its share price rallying to a record high last week. It may not be long before another waste collection stock appears on the positive breakouts list - GFL Environmental Inc. (GFL-T). Over the past month, GFL’s share price has rallied 15.5 per cent, making it the top-performing stock in the S&P/TSX Industrials Sector Index.
GFL has a number of potential catalysts that may give the share price additional momentum in the near-term, including announcement of a sizeable acquisition and details about the streamlining of its operations with the divesture of its non-core infrastructure division.
The stock has 11 buy recommendations with a forecast return of 30 per cent.
A brief outline on GFL is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Ontario-based GFL has three main sources of revenue: solid waste (such as municipal residential and commercial garbage collections and third-party landfills), infrastructure and soil remediation, and liquid waste. The company has a diversified customer base. With its bright green collection trucks, the company’s operations span across nine Canadian provinces and 26 U.S. states.
In terms of its 2021 revenue breakdown, solid waste represented the bulk of the company’s total revenue, almost 80 per cent of revenue, infrastructure and soil remediation accounted for 9 per cent of revenue, and liquid waste represented 11 per cent of revenue. The company’s solid waste segment has the highest margins. In 2021, the adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin was 30.9 per cent for solid waste, 17.7 per cent for infrastructure and soil remediation, and 24.5 per cent for liquid waste.
According to Bloomberg, Ontario Teachers’ Pension Plan Board (OTPP) owns 13 per cent of the shares outstanding and London-based BC Partners, an international private equity firm, owns 34 per cent of the shares outstanding.
The stock has a dual-class share structure with subordinated voting shares and multiple voting shares.
The stock is dual-listed, trading on the Toronto Stock Exchange as well as the New York Stock Exchange under the ticker GFL.
Investment thesis
- Industry leader: GFL is North America’s fourth largest diversified environmental services company.
- Organic, or internal, growth: Management is guiding to between 5 per cent and 6 per cent of organic growth in 2022, mainly from price increases but also from higher volumes.
- Acquisition growth: Management target revenue growth (organic plus announced acquisitions) of between 14 per cent and 16 per cent in 2022. In 2021, the company completed 46 acquisitions. The industry is highly fragmented with many regional and independent operators providing GFL with opportunistic tuck-in (smaller) acquisitions to fuel the company’s continued growth. Management indicated it has a ‘robust’ pipeline of acquisition opportunities and identified one larger acquisition that would be immediately accretive and potentially occur in the first half of 2022, which would be followed by smaller acquisitions.
- Room for multiple expansion: Right now, the stock trades at a significant discount relative to its industry peers on an EV/EBITDA (enterprise value/EBITDA) basis. However, as the company’s streamlines its operations and divests its non-core infrastructure services business, its profitability will continue to improve (adjusted EBITDA margin expansion). Consequently, the multiple may expand and analysts’ target prices may rise.
- Potential catalysts: 1) strong earnings results and margin improvement (the adjusted EBITDA margin has expanded to 26.5 per cent in 2021 from 25.7 per cent in 2020 and 24.7 per cent in fiscal 2019); 2) unlocking shareholder value by streamlining its operations - divesting its non-core infrastructure division and creating Green Infrastructure Partners (GIPI). Solid waste would increase to approximately 86 per cent of total revenue, up from 80 per cent and management anticipates the adjusted EBITDA margin will increase by 100 basis points to 27.5 per cent from 26.5 per cent; 3) value creation from taking GIPI public; 4) acquisition announcements: 5) securing additional joint ventures for RNG projects driving free cash flow higher (management targets $1-billion in free cash flow in 2024); 6) deleveraging its balance sheet.
- Potential risks to consider: 1) high net leverage (4.75 times at the end of 2021), 2) multiple compressing in growth stocks; and 3) volatility in the share price.
Quarterly earnings results
After the market closed on Feb. 9, GFL released its fourth-quarter 2021 financial results. Revenue came in at $1.54-billion, up 25 per cent year-over-year. Adjusted EBITDA was $388-million, up 25 per cent year-over-year and above the Street’s forecast of $371-million. The EBITDA margin stood at 25.3 per cent. The company exited the year with net leverage of 4.75 times. During the quarter, the company made 17 acquisitions. Over the next two trading sessions, the share price dropped 5 per cent on high volume.
On the earnings call, founder, chairman, chief executive officer and president Patrick Dovigi remarked on the management’s plans to streamline its operations by divesting its infrastructure services division, “We see a highly attractive value creation opportunity by spinning-off the infrastructure services business and allowing to capitalize on the value creation that we believe will far exceed its value within size GFL. The form of the transaction we’ll see a sell the infrastructure business, the Green Infrastructure Partners (GIPI) for cash and equity interest in the new entity. When complete, we will no longer recognize the results of infrastructure services within GFL financial statements. Instead, we will carry our investment in Green Infrastructure Partners that we can monetize overtime as value is created. While the timing of the infrastructure services the venture is still a moving target, we intend to execute the plan in the near-term.” He added, “In summary, the weighting of solid waste in the portfolio increases, EBITDA margins increase and the retaining soil remediation division will be combined with our liquid waste segment and renamed environmental services simplifying our overall segment reporting. Finally, we think there’s an opportunity to take the cash component of the consideration we got for the infrastructure business and redeploying into near-term M&A [merger and acquisition] opportunities to backfill the divested infrastructure services EBITDA. With the increase in the leading of solid waste and opportunity for near-term M&A, this reaffirms our conviction that, there are still a lot of opportunities for growth within our solid waste business, both organically and through accretive acquisitions.”
On May 4, the company will be reporting its first-quarter financial results after the market closes. Management will be hosting an earnings call the following day at 8:30 a.m. ET. The Street is anticipating the company to report revenue of $1.35-billion and EBITDA of $348-million.
Dividend policy
The stock has a nominal yield.
On April 7, the company announced a 10-per-cent dividend increase, hiking its quarterly dividend to 1.2 U.S. cents per share, up from 1.1 U.S. cents per share. This equates to a yearly dividend of 4.8 U.S. cents per share and current annualized yield of 0.15 per cent.
Analysts’ recommendations
The company is actively covered by 12 analysts, of which 11 analysts have buy recommendations. Darryl McCoubrey at Veritas Investment Research has a ”sell” recommendation.
The firms providing recent research coverage on the company are: ATB Capital Markets, BMO Nesbitt Burns, CIBC World Markets, Jefferies, J.P. Morgan, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, Stifel, TD Securities and Veritas Investment Research.
Revised recommendations
After the company released its fourth-quarter earnings results in Feb., four analysts revised their expectations – all slightly lower.
- CIBC’s Kevin Chiang to $56 from $58.
- TD’s Tim James to $55 from $56.
- Raymond James’ Tyler Brown to US$41 from US$44.
- Scotiabank’s Mark Neville to US$48 from US$50.
Financial forecasts
The Street is forecasting revenue of $6-billion in 2022, up 32 per cent from $5.53-billion reported in 2021, rising to $6.38-billion in 2023. The consensus EBITDA estimates are $1.65-billion in 2022, up 36 per cent from $1.46-billion reported in 2021, increasing to $1.79-billion in 2023.
Management expects revenue to grow between 14 per cent and 16 per cent in 2022, and adjusted EBITDA to expand between 15 per cent and 18 per cent. Management has provided the following 2022 guidance: revenue of between $6.27-billion and $6.37-billion, adjusted EBITDA of between $1.69-billion and $1.73-billion, adjusted free cash flow of between $665-million and $695-million, and net leverage of roughly 4.3 times.
With the divesture of the infrastructure division, management targets revenue to be between $5.83-billion and $5.93-billion in 2022, representing a decline of approximately $440-million. Adjusted EBITDA is anticipated to be between $1.63-billion and $1.67-billion. Adjusted free cash flow is targeted at between $625-million and $655-million.
Earnings expectations have decreased in recent months and may go down further once management announced firm details about the infrastructure division divestiture. Three months ago, the consensus EBITDA estimates were $1.7-billion for 2022 and $1.82-billion for 2023.
Valuation
According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 12.3 times the 2023 consensus estimate. In comparison, industry peer Waste Connections Inc. is trading at a much higher EV/EBITDA multiple of 18.1 times.
The average target price is $53.15, implying the share price has 30-per-cent upside potential over the next year.
Insider transactions
Over the past year, there have not been any trades in the public market reported by insiders.
Chart watch
The stock began trading on the Toronto Stock Exchange and New York Stock Exchange in March 2020. As a result, technical analysis is somewhat limited.
Year-to-date, the share price is down 14 per cent. In contrast, shares of its peer Waste Connections Inc. have rallied 6 per cent.
However, GFL’s share price has rallied 15.5 per cent over the past month, making it the top-performing stock in the S&P/TSX Industrials Sector Index.
In terms of key resistance and support levels, the next major ceiling of resistance is roughly between $44 to $45, near its 200-day moving average at $43.81. After that, there is overhead resistance around $50. Looking at the downside, there is initial support around $38, near its 50-day moving average at $38.52. Failing that, there is strong support around $35.
ESG Risk Rating
On the earnings call, the CEO said, “ESG continues to be a focus; it is core to our organic growth strategy. We released our updated sustainability report for 2020 in Q4 [fourth quarter] and we will be releasing our sustainability action plan with our ESG targets, goals and objectives in our 2022 sustainability report later this year.”
According to Systainalytics, the stock has a risk rating of 20.6. A risk score between 20 and 30 reflects medium risk. This rating is as of Jan. 24, 2022. This is in-line with the rating of GFL’s peer Waste Connections Inc., which received a risk rating of 20.0.
MSCI gives the stock a ‘B’ rating. This rating identifies the stock as a ‘laggard’, defined as “a company lagging its industry based on its high exposure and failure to manage significant ESG risks”.
The Bloomberg ESG score is 36, which is at the lower end of the 0 to 100 scale. The higher the score, the greater the transparency of its disclosures.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty