GFL Environmental Inc. (ticker: GFL CN): $18bln CAD market cap; $26bln EV; Trades @ 10.6x '25 EV/EBITDA; Exit 2023 < 4x leverage 

Background: 

• 4th largest environmental services co in NA, primarily comprised of Solid Waste Assets and Haz Waste Businesses: 

  • IPO'ed in March 2020 

  • GFL was a PE backed roll up that had done 40 acquisitions over 6yrs for $6bln CAD revenue prior to IPO 

  • Led by CEO and former hockey player Patrick Dovigi who owns 11% of the company 

• Company's business split is 80% solid waste and 20% haz waste: 

  • SW assets primarily in less competitive secondary and tertiary markets where it is either an exclusive operator or within an oligopoly 

  • Haz waste business is asset light (no landfills or incinerators) -- emergency services, soil remediation, waste water treatment, vacuum services  

• Organic growth rate is ~MSD+, EBITDA growth low teens and adj. FCF growth in the mid 20s: 

  • Current revenue run-rate $7.4bln in revenue, $2bln in EBITDA and $700mm of adj. FCF 

   

What’s The Thesis? 

• As a set of relatively recently acquired assets, GFL has the most runway to boost revenue (pricing), margins and cash flow relative to more mature peers: 

  • GFL is in the earlier innings of such initiatives as automation (side loading trucks), CNG fleet, fuel surcharges and pricing renewals 

  • As such, GFL will have industry leading revenue growth and margin expansion over the coming years 

• RNG cap-light investments to generate incremental EBITDA and accretive FCF margins in the coming years: 

  • EBITDA outlook contemplate $2 RINs and $2.50 nat gas 

• Stock trading at undemanding multiple (10.5x '25 EBITDA) given growth prospects, margin expansion opportunity and FCF growth: 

  • Industry leading growers WCN/Casella Waste trade at 14-15x '25 EBITDA 

• Inflection Point: 

• Management is opportunistically divesting lower margin assets (@ 14x or a premium to its current trading multiple) to reduce leverage: 

  • Divestitures to be FCF accretive given interest savings 

• GFL seeing best in class pricing, proving out thesis that they are strongly positioned in their respective markets: 

  • Realized DD pricing growth for the 6th quarter in a row (core solid waste pricing 10.4% in Q2 23)  

• Management's expressed commitment to see the convergence of adj. FCF to regular FCF: 

  • Believes FCF can compound at 25% CAGR over the next 3-4yrs 

Valuation: 

Why We Are Getting This Opportunity? 

• In Q2 23, GFL announced incremental $200-300mm of Capex, which surprised the market: 

  • Limited unadjusted FCF has been a major component of the bear thesis 

  • Management neglected highlight that 80% of said capex was pulled forward from 2024 

  • Management neglected highlight that the returns of these capex projects ($50mm of EBITDA) were incremental to the already robust earnings algorithm  

  • As a result, the stock broke its recent secondary offering pricing level ($36.20) which likely triggered additional selling 

  • Change: Management messages the ROI on incremental investments better in future calls/presentation 

• Under the Radar: 

  • IPO'ed in March 2020 

  • Not in indices 

  • Sponsor overhang (BC Partners, GIC, Ontario Teachers') 

  • Change: Secondaries have been orderly; CEO hasn't sold 

• Highly Levered (~5x at IPO) 

  • Change: Selling assets to delever 

• Historically adjustments to FCF related to: 

  • Acquisition expenses 

  • TEU accounting 

  • Change: Most items rolling off 

• Complicated Cap Structure: 

  • Had TEU units (Tangible Equity Units) offered at IPO (yield + stock component) 

  • Change: TEU converted to stock 

• Had a non-core business in GFL Infrastructure: 

  • Performed Civil works including specialty excavation, demolition 

  • Change: Spun Off GFL Infrastructure 

   

Catalysts 

• Management gives greater color into FY 2024 on Q3 call:  

  • Outlines outsized margin expansion due to declining inflation and still robust pricing 

  • Pull forward of 2024 capex into 2023 will lead to even strong '24 FCF 

• GFL hits mid 3x leverage in FY 2024 and gets an IG rating -- helping drive down the cost of debt 

Risks 

• GFL lags broader market with rotation out of perceived more defensive waste names