Following the company’s trading update at the Macquarie Conference shares in CWY rallied +5.8% yesterday, an impressive move in a weak market – arguably a case of no bad news is good enough for stocks that have been weak over the last year. Our takeouts apart from the encouraging reaffirmation of guidance from February 2023 are outlined below, importantly they are making positive progress on the 4 key areas that improve margins and subsequent profitability:
- Commodity margin restored, tight labour issues improving, QLD solid collections improving and Health Services now operating 24/7.
The business is now stabilised and is making significant progress on its “Blueprint 2030” underpinning longer-term value creation and solid earnings growth driven by margin recovery – this is a stock that will tick fund managers’ ESG boxes with Energy-from-Waste one of its focal points in the Blueprint 2030. We expect underlying revenue to remain strong as CWY continues to pass through price rises which are reflected in the company’s guidance for FY23 EBITDA of $670mn including the GRL contributions. One important point that some subscribers might want to consider is CWY does not expect to resume franking dividends fully until December 2024 owing to the take-up of instant write-off allowances.
- We like the risk/reward towards CWY, this is a recovery story with an initial target 10-15% higher.
We see more risks on the upside to earnings from the likes of increased regulatory incentives and government and corporate sustainability initiatives and while the stock is unlikely to repeat its post-COVID performance we do like its valuation and profile in a market that looks close to fully valued in many areas.
MM is bullish CWY under $2.60
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