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 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:

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:

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)

Catalyst