Investors seeking an industry sector - that is almost certain to grow would be wise to take a look at the Waste Management sector.
Andrew Mitchell (Ophir Asset Management) is attracted to the sector because “Waste is a huge industry which will increase with population growth.” He also likes the high barriers to entry in particular segments of the waste sector such as municipal collections and commercial waste.
The chart below shows the growth in core waste in Australia over a decade with a compound annual growth rate of 1.2%pa.
There are three main segments of the waste industry:
- Municipal (council kerbside household waste)
- Commercial / Industrial waste
- Building and demolition (construction and infrastructure)
Municipal and Commercial waste is generally considered ‘recession proof’ among professional investors while building and demolition waste is more cyclical.
Waste Management companies of the future are increasingly focussed on recycling, particularly following the introduction of the Chinese ‘National Sword’ policy last year. China used to be the biggest importer of recyclable materials globally. It took 30m tonnes of the world’s waste each year, including Australia’s. Put simply, China used to buy the world’s recyclable waste, and it largely banned it overnight. Australia will need to build its own recycling facilities to dispose of the waste appropriately.
Mitchell believes that “it’s becoming a social imperative that more is done with waste. The call for more to be done on sustainability and recycling is growing louder within the community. We believe Australians are becoming more accepting now of paying for the cost of sustainability.”
Emma Goodsell (Airlie Funds Management) says “the waste management industry is increasingly focused on building out critical recycling infrastructure. The issue for the whole waste supply chain is that the cheapest way of doing things is usually the worst for the environment (ie landfill). So it requires government intervention, in the form of levies on the cost of disposing a tonne of waste into a landfill, to adjust the playing field and allow for investment in recycling assets.”
The graph below shows the growth in recycling over a decade, with compound annual growth of 2.4%pa.
Landfill levies collected by the NSW government alone are approaching $1bn per year and are increasing. Australia recycles or converts waste to energy for around 50% of waste according to Mitchell, so is considered middle of the pack by global standards compared with the US or developed European peers where this figure is around 80% plus. Mitchell sees Government landfill levies as a potential revenue pool for Waste Management companies who are able to divert waste from landfill.
Goodsell points to Cleanaway’s joint venture with Macquarie’s Green Investment Group for a Western Sydney plant that will convert waste to energy as an example of business diverting waste from landfill. This plant is likely to have the capacity to cut landfill volumes by 500 kilotonnes per year.
The biggest risks of investing in this sector would seem to be regulatory. There is a lack of cohesion between State Governments which results in the waste industry being effectively different in every state. Landfill levies can vary significantly from state to state and until recently Queensland didn’t charge a landfill levy which saw large movements of NSW waste shipped across the border. Lack of uniformity in bin sizes across states increases costs as trucks need to be designed differently for each state.
Mitchell believes that Governments are slowly realising that more needs to be done in the waste sector, particularly with more national cohesion noting that there is now a Federal minister for waste reduction.
The ASX is home to one of the worlds’ largest listed waste management companies, Cleanaway (formerly Transpacific Industries), and Bingo Industries is a relatively new addition to the ASX. Mitchell is attracted to Cleanaway as “we like the more stable and defensive earnings streams of Cleanaway (mainly municipal and commercial) whereas Bingo operates in the more volatile/cyclical building and demolition space. There are also a lot lower barriers to entry in that part of the market (Bingo Industries)”.
Most investors would associate waste management with garbage collection, where as the future lies with the recycling of waste.
This article was written by Mark Draper (GEM Capital) and appeared in the Australian Financial Review during October 2019