IESI-BFC Ltd. (BIN) started listing on the NYSE on Friday without much fanfare despite being one of the largest waste management companies in North America with revenues approaching $1.1 billion. It has been listed publically in Canada for the past few years as an Income Trust, and late last year it converted to a C- corporation. It trades at a discount to comps at 5.6X EV/EBITDA, and 12% FCF yield, and will pay $1 in dividends this year.
BIN was formed in 2000 with the acquisition of Browning Ferris Canada from Allied Waste. The company went public in Canada in 2002 and in 2005 it acquired IESI to enter the U.S. market. Up until late last year it was traded as an Income Trust on the Toronto Stock Exchange. With the weakening of the Income Trust market in Canada, shareholders voted to convert BIN into a C-Corp which better enables to more flexible in retaining capital for growth, particularly in the United States. Last Friday the company simultaneously raised $150mm in Equity and started listing on the NYSE under the ticker BIN.
The waste management industry can basically be described in a few parts:
Collection: This is where the waste management company actually collects waste from garbage bins from residential (people's homes), commercial (restaurants, offices etc.), and industrial (manufacturing and construction). Fee's are charged by the container size, frequency of pick up, waste type and weight. Collection typically carries the lowest margin but also is less capital intensive than operating a landfill.
Transfer Stations: These are locations where waste is handled and sorted before heading for the land fill or incineration. Fees charged are based on the volume, type and distance to the landfill. Many times transfer station owners do not collect the waste they receive.
Recycling: Here solid waste collections are sorted and resold. Pricing depends on where commodity prices are for aluminum, steel, cardboard etc.
Landfill: This is where the waste is ultimately disposed. It is the most capital intensive part of the waste management chain but also carries the highest margin. Permits for new or expanded landfills are sometimes difficult and have a long lead time. Landfill owners charge fees based on the type, volume and weight of waste.
The waste management industry has seen a lot of consolidation over the years but is still somewhat fragmented with independent privately owned operators. The largest public player is Waste Management (WMI) with about $12.2 billion in revenues, followed by Republic Services with about 8.4 billion in revenues, and Waste Connections with about $1.2 billion in revenues. The industry has seen leveraged transactions due to the stable cash flows of the business, which has lead to overpaying at times and not earning the buyers cost of capital. The public companies have traded in a range of 6-10X EBITDA depending on the financing environment. Currently, they are trading at the low end of the range.
Recession Resistant. The business of collecting and disposing of solid waste has historically been a recession resistant and in particular collecting waste from residential and commercial customers is particularly less sensitive to a change in GDP. Households typically do not stop garbage collections when the economy softens, nor do commercial businesses such as restaurants or grocery stores. Certain waste collection services are more sensitive to economic conditions such as collections from industrial customers and customers tied closely to construction projects.
Capital Intensive with Barriers to Entry. It is rare that a new entrant comes into a market to try to steal market share from an existent landfill or collections business. In many geographic regions the municipality operates its own collections, although there has been a trend in privatization.
Pricing Discipline. With the consolidation over the years pricing has been disciplined among the industry. Despite the weak economy, the industry raised prices about 5% in 2008 and another 3-4% in the first quarter of 2009. These price increases help offset volume declines and set the stage for expanded margins when volumes improve. For BIN, their average customer pays them only about $3k/year, so a 5% price hike is not a lot for the customer to absorb in a much needed service.
Synergies. Waste management companies are always looking for ways to optimize overhead and costs. The larger companies are able to leverage its vertical integration between collection and landfill to reduce costs and create efficiencies. Smaller competitors who do not own the landfill are subject to price increases and do not have the same leverage as a larger player does.
BIN's strategy is to enter the market and vertically integrate landfill, transfer station and collection operations to create efficiency and profitability. By focusing on a specific geographic area, BIN can capture the most margin. Currently BIN has about 35% of its business in landfill and transfer stations compared to 26% for RSG and 29% for WMI. BIN in the future will be focusing on acquiring more collection assets which carry a higher return on capital to optimize their landfill strengths. Acquisitions will be a key part of this strategy and fortunately the mutliples have come down dramatically to help BIN achieve these goals.
BINs recent equity raise, most recently $150mm last week, serves to deleverage the balance sheet to prepare for growth and acqusitions in the US. Raising equity also provided a good opportunity to be listed in the US where it trades a discount to comps on a EV/EBITDA and Price to Free Cash flow.
The best way to analyze the company is to look at Price to FCF, EV/EBITDA or even EV/(EBITDA less maintenance capex). Currently BIN trades at almost a 14% FCF yield, and 5.4 EV/EBITDA, and on an EV/(EBITDA less maintenance capex), it trades at 8.6X.
Comparables all trade at higher multiples. Both RSG and WMI trade at about a 10% FCF, and an EV/EBITDA of north of 6 bucks. One can argue that the group is cheap and has room to run as well. It is worth noting that BIN has also had higher organic growth over WMI and RSG over the past 4 years, and has seen a lower reduction in volume in Q1 (about 4% versus 8%). The reason for its better volume numbers is because it has less concentration in Industrial customers.
A unique quality of BIN is that investors receive a healthy dividend in 2009, to be followed up by a solid distribution policy in 2010. In 2009, BIN will pay $1.00 Canadian or about 90 cents US to its investors. Apporximately 45 cents is a regular dividend that will be maintained or increased in future years, while the other 45 cents is a special dividend which is left over from its Income Trust Days. The next dividend is at the end of the month for about 22.5 cents or 9% annualized.
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