IESI-BFC LTD BIN
August 26, 2010 - 5:52pm EST by
spike945
2010 2011
Price: 22.60 EPS $0.95 $1.30
Shares Out. (in M): 141 P/E 23.8x 17.4x
Market Cap (in $M): 2,750 P/FCF 13.3x 11.5x
Net Debt (in $M): 1,060 EBIT 270 340
TEV ($): 3,810 TEV/EBIT 14.1x 11.2x

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Description

BIN offers a chance to invest in the #3 player in a consolidating industry with good barriers to entry and improving returns on assets and capital, all at good absolute and relative valuation. We see this as stable growth at a reasonable price, a stock that should produce excellent returns over the long haul.

BIN was previously written up by frankie3 in June of 2009 and I refer you to that excellent write-up for background. Though the stock has appreciated significantly since BIN listed on the NYSE in 2009, a lot of that reflected a ridiculously low initial valuation for an orphan stock listing just past the trough of the downturn. Since then, management has executed on their strategy of increased asset utilization, have improved returns on capital, grown EBITDA and FCF, and allocated capital well - particularly the game-changing merger with WSII which has just closed. In addition, the solid waste industry overall has cleaned its act up (pardon the pun) from a shareholder value perspective, driven by consolidation and improved focus on capital discipline. The industry has localized monopoly characteristics and with the right discipline returns on capital should continue to improve for the players with the right assets.

Some brief history of BIN:

BIN was founded in 2000 as BFI Canada, a Canadian Income Trust, by acquiring the Canadian assets of BFI from Allied Waste. It IPO'd in Canada in 2002 as an income trust. The firm grew by acquisition over the years including the 2005 expansion into the US with the purchase of IESI (hence the cumbersome name of the company).  In 2008, the trust announced its intent to convert to a corporation and in 2009 listed its shares on the NYSE. The company announced the intent to merge with WSII in late 2009 in an all-stock deal and recently completed the merger, making it the #3 player in the North American solid waste industry behind WMI and RSG.

The US IPO, intended to help de-lever the balance sheet, came at a tough time for the capital markets and a double-digit free cash flow yield and $1 dividend (50c one-time and 50c recurring) were not enough to stir excitement. Canadian income investors had been turned off, and US investors were leery of the waste sector which was still experiencing declining volumes, plus the company was far smaller than its peers RSG and WM.

Operations:

The company's website gives an excellent overview of their operations and assets:

http://www.bficanada.com/Theme/Bfi/files/2010%20AGM%20PPT%20DRAFT%20June%201%202010%20FINAL.pdf

The company operates collection, transfer stations, landfills and recycling facilities. Geographically the breakdown of the combined company based on 2009 numbers is

  • Canada (~40% of combined revenues). Concentration in BC/Alberta in the West and Ontario in the East . Business breakdown is 73% Collection services (split about 38%/18%/17% between Commercial, Industrial and Residential), 22% transfer and disposal and 5% Recycling
  • United States (~60% of combined revenues). Divided into the NorthEast (includes NY, PA, MJ, MD), South (concentration in TX /LA/OK and Florida). Business breakdown is 63% Collection services (split about 27%/15%/21% between Commercial, Industrial and Residential), 33% transfer and disposal and 4% Recycling

 

 

The opportunity:

We see several ways to win with BIN:

1.       Continuing trend to improving ROIC - from increased asset utilization, pricing discipline and improved capital allocation. The degree of internalization (controlling waste streams from the point of collection through disposal) was historically below that of peers, especially in the NorthEast, leading to lower returns on assets. Added to this, the company had historically (in our view) overpaid for several of its acquisitions.  In our early conversations with the CFO this was something we explored in detail as the ROEs and ROICs were poor (though improving). Our interpretation was that they flat overpaid, but have seen the light, taken a page from the playbooks of RSG, WCN and WM, and are far more focused on asset turns and return on capital now. The merger with WSII offers an immediate opportunity for Increased internalization of the company's own waste streams, particularly in the US NorthEast operations.

2.       Consolidation means increasingly rational competition. Canada, which has consolidated faster than the US market, boasts EBITDA margins of ~35% vs ~25% for US. This points the way for the future of the company and is one of the reasons that we are excited about its prospects. Pricing and asset utilization in Canada have been far ahead of that in the US, as markets have tended to consolidate down to a couple of players, leading to increased internalization and better price discipline. (When you look at the industry's historical ROIC, capital discipline is overdue).

3.       Accretive tuck-in acquisition opportunities within or adjacent to existing footprint.  The IPO last year and the all-stock merger with WSII have given BIN the balance sheet to continue to pursue attractive acquisitions. The company is well positioned in several attractive markets where there is population growth and the potential for further asset rationalization - both between the major players (non-core asset sales from RSG etc) , or to pick up minor players who have been hit hard by the downturn and whose leverage over landfill pricing is reduced as internalization rates increase.  BIN has closed two deals (York and SWDI, both with revenues in the low-to-mid $40 million range) in the last couple of months alone.

4.       Sandbagging on synergies. There are some obvious opportunities for synergies from the WSII merger - eliminating duplication of corporate overhead, closing offices, internalizing waste volumes. The firm has guided to $25-$30MM of EBITDA, we think $40MM would be closer to the mark.

5.       Coming out of a trough: BIN, like all waste players, was impacted by the downturn in Industrial waste loads over the last couple of years - especially those related to construction.  Volumes have begun to improve for BIN in the US. Likewise, small steady price increases are fattening the bottom line. I personally don't expect anything but a slow grind for the economy, but the companies will grow even in that environment, and there is leverage to accelerating volumes if they occur.

 

Valuation:

We project low growth going forward but expect overall EBITDA margins to continue to improve into the low 30% range, driven by stable volumes, 2% price increases, and cost control/synergies from the acquired properties.

 

2010

2011

2012

Revenue

1710

1810

1910

EBITDA

475

545

585

FCF

200

240

264

 

The 2010 projections are based on a full year for the combined company plus the two recently announced deals. I assume 2% revenue growth from existing operations (I think that there is a case to be made for faster organic revenue growth given both pricing and volume levers) and and model a low level (50mm/yr) of continued tuck in acquisitions.

Valuation:

 

EV/EBITDA 2010

EV/EBITDA 2011

P/FCF 2010

P/FCF 2011

WM

7.2

6.7

12.9

12.1

RSG

7.6

7.2

15.5

12.1

WCN

9.0

8.3

14.1

12.8

BIN

7.8

6.7

13.3

11.5

 

The sector as a whole is reasonably priced but BIN is the cheapest on EV/EBITDA and P/FCF, and I would argue has better growth prospects.  Their size works in their favor given that smaller deals move the needle far more for them than their peers.  Management appears to have learned their lessons, as has the industry as a whole, and you get paid a 2% dividend to wait as they execute.

Using a 14x multiple of 2011 FCF or 8x EV/EBITDA we see upside to $28, but we believe that understates the opportunity for BIN and the industry as a whole. Increased route density and internalization will drive higher ROAs and ROIC. A consequence of that will be diminished returns for smaller local competitors without vertical integration. If BIN maintains capital discipline it should be able to continue to do deals at an attractive ROIC, and drive shareholder returns higher

 

Risks:

Exposure to an economic downturn. Though solid waste is not recession resistant it is resilient, other than the volatile C&D waste streams, which BIN has less of than its peers. Nonetheless, a double dip will affect commercial and industrial waste volumes and lower the value of recycled materials.  Potential hedges with major indices could be used to hedge out much of the macro risk.

Exposure to TX and NY. These two states are a big portion of revenues for BIN, and NY state in particular has been an area where returns on capital have lagged. The housing downturn will continue to affect the company there, though increased internalization should help mitigate the effects somewhat.

Capital Discipline. The current single digit ROIC tells of a history of over-paying during the boom years. Management appear to have gotten religion about this issue, talk to increased asset turns and ROIC and also appear to be focused on smaller deals, but only time will tell.

Canada. Clearly a jewel for the company, with the highest margins and volume growth, the Canadian assets are obviously influenced by the Canadian economy, which has been booming relative to the US. If Canada's economy hits the skids, that will affect BIN, and a fall in the FX rate will affect the value of the Canadian profit stream to overall operations.

Catalyst

Execution on merger plan - increase in announced synergies
Further acquisitions
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