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GFL Environmental: Valuation Gap With Peers Should Close Over Time

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Environmental work motortruck successful Toronto, Canada

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Executive Summary

Despite delivering awesome maturation complete nan past fewer years, pinch a CAGR of 30% successful revenues and 37% successful EBITDA from 2017 to 2021, GFL Environmental (NYSE:GFL) trades astatine nan lowest aggregate successful its peer group.

Currently, nan company's EV/EBITDA aggregate stands astatine conscionable 11.8x, compared to an mean of astir 15x for its peers. This presents an charismatic opportunity for investors looking to put successful nan discarded guidance industry, which has precocious barriers to entry, nary cyclicality, and small obsolescence risk.

Situation Overview

GFL Environmental is simply a Canadian-based biology services institution that provides a scope of discarded guidance services to customers crossed North America. The institution operates done 2 superior business segments: coagulated discarded and liquid waste. With a immense web of disposal accommodation and assets, GFL Environmental offers a broad suite of services including collection, transportation, disposal, recycling, and processing of solid and liquid waste.

The discarded guidance manufacture is charismatic for 2 main reasons:

Firstly, it is highly stable, pinch integrated maturation of astir 4-5% per twelvemonth driven by measurement maturation and value increases. The discarded guidance manufacture has important pricing powerfulness owed to nan truth that discarded postulation typically represents a mini information of customers' wide costs structure, meaning that moreover important pricing increases person a minimal effect connected customer behavior.

Secondly, nan discarded guidance manufacture benefits from precocious barriers to introduction successful section markets, which limit title and supply pricing powerfulness to awesome players. These barriers see nan request for important superior investments successful instrumentality and facilities, analyzable regulations, and nan trouble of building and maintaining relationships pinch section customers. Additionally, businesslike way density (driving much pickup measurement per garbage truck) allows larger companies to run much efficiently, thrust amended margins, and undercut smaller competitors to summation marketplace share. In fact, scaled discarded guidance companies tin leverage their standard to put successful technology, maintenance, and customer service, further strengthening their competitory advantages, while smaller competitors struggle to compete connected price, support value and reliability, and support up pinch larger competitors. As a result, nan discarded guidance manufacture exhibits a precocious grade of stableness astatine nan top, pinch ample discarded postulation companies that person achieved section standard seldom being displaced.

Overall, nan discarded guidance manufacture presents an charismatic finance opportunity for seeking semipermanent maturation pinch minimal consequence of obsolescence, owing to its operation of precocious barriers to introduction and charismatic manufacture structure.

GFL's Growth Opportunity

Despite benefiting importantly from economies of scale, nan discarded postulation business remains highly fragmented. In Canada and nan US, nan 3 largest companies clasp only 30% and 50% marketplace share, respectively, pinch nan remaining marketplace consisting of thousands of mini mom-and-pop aliases location businesses (Source: GFL F-1 filing). This presents a important opportunity for scaled discarded guidance companies to consolidate these businesses and execute sizeable synergies. GFL, which operates pinch higher leverage (4-4.5x debt/EBITDA vs 2.5-3x) and deploys much superior into mergers and acquisitions than its peers, has been capable to leverage this opportunity to turn faster than its peers. In fact, this levered superior building is optimal for nan business fixed nan attractiveness of tuck-in M&A and nan industry's stability.

Since 2007, GFL has completed complete 100 acquisitions, which were completed astatine an mean EBITDA aggregate of 7.0x, earlier synergies (Source: GFL 2022 investor presentation). Post synergies, these deals were completed astatine an mean EBITDA aggregate of 5.0-6.0x EBITDA, providing precocious soul rates of return erstwhile financed pinch 4-4.5 turns of leverage. Since its IPO, GFL has committed to continuing this M&A program. Management has indicated that they expect to execute 25-30 tuck-in acquisitions annually for businesses pinch $1-10MM of EBITDA.

In their 2022 investor time presentation, GFL’s guidance squad outlined a span to a 2024 exit FCF tally complaint of $990-$1,080. The institution has consistently surpassed akin guidance successful nan past, and I judge this inclination will continue. The projected FCF tally complaint and EBITDA are based connected blimpish measurement maturation assumptions successful nan aftermath of COVID, and M&A expectations that are humble compared to GFL's past way record.

Finally, 1 of nan charismatic aspects of GFL's discarded guidance business is that it is inflation-protected. This is owed successful portion to nan truth that GFL's pricing is typically linked to nan user value scale (CPI). As ostentation rises, GFL is capable to summation prices accordingly, maintaining its margins and protecting against nan antagonistic effects of inflation. In addition, discarded guidance is mostly considered to beryllium a non-cyclical industry, meaning that it is little susceptible to economical downturns and recessions. This provides a level of stableness to GFL's business exemplary which successful move allows nan business to support its levered superior building that is designed to magnify shareholder returns.

Overall, fixed GFL's history of surpassing guidance, it is apt that nan existent results will transcend nan projections.

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GFL's 2024 guidance (GFL Environmental)

Valuation

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Valuation Table (MontrealValue)

The opportunity and finance thesis successful GFL are comparatively straightforward.

On nan qualitative side, this is simply a high-quality business tally by a shrewd guidance squad pinch tegument successful nan crippled –and aligned pinch creating shareholder value. On nan quantitative side, GFL trades astatine astir 10x guardant EBITDA, which is simply a important discount to its peers, pinch Waste Management (WM) and Republic Services (RSG) trading astatine astir 11-12x, and Waste Connections (WCN) and Casella (CWST) trading astatine astir 15x. This discount appears unjustified, considering that nan value level of GFL's assets is nary worse, if not amended than immoderate of its peers. In fact, aft considering various factors specified arsenic GFL's growth, insider alignment, optimal superior structure, and history of successful M&A, it seems reasonable that nan institution should waste and acquisition a premium to its adjacent group.

On 2023 estimates, if GFL banal were to rerate conscionable successful statement pinch its adjacent group, shares would beryllium worthy ~$59 per share, aliases astir 45% higher than its existent price.

Given GFL is simply a comparatively caller publically traded company, its discount pinch peers should constrictive complete clip arsenic it proves it tin present accordant maturation and meet/beat its semipermanent guidance.

Risks

Investing successful GFL Environmental comes pinch a fewer risks. Firstly, discarded guidance is simply a capital-intensive business, and GFL operates pinch a leveraged superior structure. This intends that immoderate changes successful liking rates could effect nan company's profitability and expertise to work its debt. Additionally, arsenic a Canadian company, GFL has vulnerability to fluctuations successful nan Canadian dollar speech rate, which could effect its revenues and profitability. The institution does hedge immoderate of its vulnerability to overseas speech risk, but location is still immoderate imaginable for volatility. Finally, discarded guidance is simply a heavy regulated industry, and immoderate changes successful regulations aliases enforcement could effect GFL's operations and financial performance.

This article was written by

MontrealValue floor plan picture

Canadian equity analyst. Full-time investor. Searching for high-quality businesses pinch agelong runways for growth. Views are my own.

Disclosure: I/we person a beneficial agelong position successful nan shares of GFL either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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