PROGRESSIVE WASTE SOLUTIONS BIN
May 31, 2013 - 4:12am EST by
erniethecat
2013 2014
Price: 23.27 EPS $0.97 $1.11
Shares Out. (in M): 115 P/E 24.0x 20.9x
Market Cap (in $M): 2,680 P/FCF 14.0x 11.6x
Net Debt (in $M): 1,637 EBIT 246 272
TEV ($): 4,317 TEV/EBIT 17.6x 15.8x

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  • Canada
  • Waste Management
  • High Barriers to Entry, Moat
  • Capital intensive
  • Recurring Revenues
  • Capital Allocation
  • Highly Cash Generative

Description

Progressive Waste Solutions Ltd. (TSX / NYSE: BIN)
May 30, 2013 per share price of $23.27 / Market capitalization of $2.68 billion

 

Progressive Waste Solutions Ltd. (TSX, NYSE: BIN) is a high-quality business that is currently trading at an attractive relative and absolute valuation.  The Company has been written up previously in June 2009 by frankie3 and again in August 2010 by spike945; I would encourage readers also to refer to those VIC submissions for good background on the name.  While the stock has remained generally flat over the past couple years, BIN is well positioned to grow free cash flow per share in the mid-teens range and could provide 50% upside over the next two to three years through share price appreciation and dividends.

 

Company Overview:

BIN is the third largest North American full-service waste management company, providing  non-hazardous waste collection and landfill disposal services for municipal, commercial, industrial and residential customers in six Canadian provinces and 13 U.S. states (primarily in Northeast and South regions).  The Company has grown largely through major acquisitions (BFI Canada in 2000; IESI Corp. in 2005; Waste Services, Inc. in 2009) as well as numerous “tuck-in” acquisitions.  BIN originally listed as an income trust in Canadain 2002 prior to converting to a c-corp and dual-listing on the NYSE in 2009.  For additional information on BIN’s operations and the industry, refer to the following recent investor presentation. (link embedded)

 

Investment Thesis: 

  1. This stock is cheap.  BIN trades for 10.6x 2014E FCF per share, an attractive valuation considering the Company should grow FCF per share in the mid-teens range for the foreseeable future under reasonably conservative assumptions.  On an enterprise value basis, BIN trades for 8.1x LTM Ebitda, a relative discount to other publicly traded waste management players (WM, RSG and WCN currently trade at 9.2x, 8.4x and 12.7x, respectively) despite BIN offering stronger growth prospects.  Looking forward, BIN currently trades at 7.1x 2014E Ebitda and 6.5x 2015E Ebitda.
     
  2. BIN is a high-quality business.  BIN offers a number of attractive investment characteristics:

    • Waste management is inherently a capital-intensive business that results in high barriers to entry.  Players like BIN that are vertically integrated with high internalization rates (controlling each link of the waste management stream: collection, transfer, and landfill/disposal) are well positioned competitively as industry consolidation continues.
    • Waste collection and disposal is an essential service that is recession-resilient/resistant; BIN only experienced modest declines in organic volumes during the 2008/2009 downturn (and was able to grow overall via acquisitions).
    • Recurring revenue streams with high degree of visibility/predictability (multi-year contracts)
    • Rational industry structure / pricing.  As the industry has consolidated, pricing has become increasingly rational.  Notably, BIN and other industry players generally were able to pass along modest price increases during the 2008/2009 recession and subsequent years.
       
  3. BIN positioned for growth in consolidating industry / track record of acquisitions.  While the estimated $60 billion+ North American waste management industry has undergone significant consolidation over the past decade, the industry remains fragmented with many further consolidation opportunities remaining (management estimates over 60% of industry available for further consolidation).  Over the past two years, BIN has invested approximately $422 million in over 30 tuck-in acquisitions.  Management indicates the M&A pipeline remains strong—currently $400 million of identified prospective targets—and anticipates additional accretive acquisitions in adjacent geographies that will improve internalization rates/drive higher margins.
     
  4. Capital allocation.  While pursuing accretive acquisitions and growth investment is the stated top priority for management, the following items are worth noting on the capital allocation front:

    • Dividend.  Recently increased annual dividend by 12% to C$0.56 (currently yielding 2.4%).
    • Share Buybacks.  BIN has spent $121 million on share buybacks over the past two fiscal years, reducing shares outstanding by approximately 5%.  Recently renewed a share buyback program to repurchase up to 7.5 million shares (approximately 6.6% of the current float).
    • Compensation/Incentive Plan Structure.  BIN recently shifted the primary target financial metric of its management compensation structure from “Adjusted Ebitda” to “Adjusted operating EBIT” to improve management focus on returns on invested capital (express recognition that depreciation and amortization very much reflect historical uses of real cash).
    • New CFO.  In August 2012, hired Ian Kidson as CFO; Mr. Kidson has over 15 years in private equity; focused on capital allocation and driving returns.
    • Debt Refinancing.  In October 2012, extended maturities to 2017/2019 and lowered interest rate spreads.  The new credit includes an accordion feature to increase the facility size up to $750 million, providing additional funding for acquisitions.

  5. Highly cash-generative business / solid balance sheet.  BIN has historically generated strong and predictable free cash flow; the Company also demonstrates a high quality of earnings, as free cash flow has historically exceeded reported net income by a significant amount.  While recent cash flows are somewhat flattered by tax benefits that will attenuate in mid-2014, BIN is still positioned to grow fully taxed free cash flow per share in the mid-teens range for the foreseeable future based on assumptions of conservative revenue growth coupled with modest margin expansion / share count reductions. 

    BIN currently has total debt of $1.66 billion, representing 3.09x leverage.  While this level is higher than management’s stated target of 2.30x to 2.70x, BIN’s debt load remains very manageable given the Company’s FCF-generation ability and hard asset base.

 

Other Topics: 

  • In addition to tuck-in acquisitions, BIN has recently committed resources to opportunistic internal infrastructure investment that management views as more strategic and discretionary than normal growth capex.  BIN has allocated a total of approximately $80 million to these initiatives over the course of 2012/2013, mostly related to the development of a natural gas generation plant at the Lachenaie landfill inQuebec; management estimates these initiatives will be complete in early 2014 and yield $18 million to $20 million in annual Ebitda contribution.
  • BIN’s operations in the U.S. Northeast have languished over the past few years with the top line not growing and adjusted Ebitda margins decreasing from 28.4% in 2009/2010 to 21.1% in 2012.  While the U.S. Northeast represents BIN’s smallest geography at 18% of sales, BIN remains committed to the region and has installed new local management to drive higher route density and increased internalization rates.  Goal is to restore margins to at least the mid-20% range over the next 18 to 24 months (Ebtida margins exceed 35% inCanadaand 28% in U.S. South).
  • Waste management typically sees uptick later in the recovery cycle; could provide additional tailwind if housing recovery is real/sustained and commercial activity picks up.

 

Valuation (USD in millions, except per share data)

Current valuation.  As noted, BIN currently trades at a discount to its peers (WM, RSG and WCN currently trade at 9.2x, 8.4x and 12.7x LTM Ebitda, respectively).  BIN’s current valuation is also attractive considering its growth profile and competitive positioning:

Price Per Share (5/30/2013)

$23.27

Shares Outstanding

115

 

 

Market Capitalization

$2,680

Less: Cash & Cash Equivalents

(30)

Plus: Debt

1,667

  Enterprise Value

$4,317

 

 

LTM Adjusted Ebitda

$532

EV / LTM Adjusted Ebitda

8.1x

 

 

LTM Ebitda - Maintenance Capex

$362

EV / LTM Ebitda - Maintenance Capex

11.9x

 

 

2014E Free Cash Flow Per Share

$2.20

2014E Price / FCF  Multiple

10.6x

 

 

Dividend

$0.55

Dividend Yield

2.4%

Price Target. Two- to three-year target price of $35.00 is predicated on 8.0x 2015E Ebitda (in line with current LTM multiple; multiple expansion could provide upside), including approximately $1.50 per share in dividends:

FY2015E Ebitda

$660

Ebitda Multiple

8.0x

 

 

Implied Enterprise Value

$5,279

Less: Estimated Net Debt

(1,653)

  Implied Market Capitalization

$3,625

 

 

Estimated Shares Outstanding (Dec-2015)

108

Implied Price Per Share

$33.50

Plus: 2.75 Years of Dividends

1.52

  Implied Price Per Share (Inc. Dividends)

$35.02

  % Upside to Current Share Price ($23.27)

50.5%

 

 

FY2015E Free Cash Flow Per Share

$2.45

Implied Free Cash Flow Yield

7.3%

Implied Price / Free Cash Flow Multiple

13.7x

 

 

FY2015E Ebitda - Maintenance Capex

$491

Implied EV / Ebitda - Maintenance Capex

10.7x


Financial Summary (USD in millions, except per share data)

The following summary assumes 2012-2015 net sales CAGR of 6.3% (assumes roughly 2% organic growth through pricing/volume increases, with balance from acquisitions/infrastructure investment) along with margin expansion of 160 basis points to restore overall Ebitda margins to 2011 and prior levels:

 

Actual

Estimated

Projected

Projected

2012 – 2015

 

2012

2013

2014

2015

% CAGR

 

 

 

 

 

 

Net Sales

$1,897

$2,025

$2,147

$2,275

6.3%

 

 

 

 

 

 

Ebitda

$520

$560

$612

$660

8.3%

% Ebitda Margin

27.4%

27.7%

28.5%

29.0%

--

 

 

 

 

 

 

Free Cash Flow

$192

$228

$243

$265

11.3%

% of Net Sales

10.1%

11.2%

11.3%

11.6%

--

FCF Per Share

$1.67

$2.01

$2.20

$2.45

13.7%


Potential Risks: 

  • Modest macro risk in event of downturn (results generally held up during 2008/2009 recession).
  • U.S. Northeast internalization rates / margins not restored (although geography represents small portion of overall business at 18%).
  • FX / Currency.  GivenCanadaaccounts for approximately 40% of BIN’s business, consolidated results are susceptible to currency swings.  Management estimates that each 1% of appreciation of the U.S. dollar results in a decrease in Ebitda of $2.5 million. (Conversely, BIN benefits by a similar amount if the Canadian dollar appreciates/U.S. dollar weakens)

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

While there are no immediately identifiable catalysts and this investment thesis is primarily based on continued growth in Ebitda and free cash flow per share, the following items are worth mentioning: 

  • Waste Connections Inc. (NYSE: WCN), another waste management operator of scale, recently announced its intention to seek a private letter ruling that would provide for master limited partnership (MLP) qualification.  Certain analysts speculate that an MLP qualification could result in 25% upside to current valuations for waste management players.  While BIN has experience operating under an income trust structure from its original 2002 listing in Canada as an income trust (BIN subsequently converted to a c-corp in 2009 in connection with a dual NYSE listing), the Company has not announced any plans to pursue MLP status based on recent comments from BIN’s CFO: “. . . we're actively watching what's going on in the U.S.  Our circumstances are perhaps a little bit more complicated than some others given the fact that we have significant operations in two different jurisdictions.  Notwithstanding that, to the extent that we see significant traction, on the part of people being able to put the landfills into the REIT's, then, yes, we absolutely will have a look at that.  But from where we sit today, . . .I think it's probably fair to say that we are actively watching as opposed to actively participating.  So total open minds, but we probably won't be leading that if you understand.” (Source: BIN earnings conference call, May 1, 2013)
     
  • Blue Harbour Group, a constructive/friendly activist fund, has invested in BIN since Q1 2012 and has continued to increase its ownership each subsequent quarter (current ownership of 3.9% in BIN); Blue Harbour Group has not publicly announced any plans to unlock value at BIN.  It is also worth noting that a number of other highly regarded funds have been building positions over recent months/quarters (SPO Advisory began buying the stock in Q3 2012 and has accumulated a stake equivalent to 6.7% ownership in BIN as of the end of Q1 2013).
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