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Waste Management delivers

By David McEwen

Friday 28th March 2003

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You've got to hand it to Waste Management. In an industry that is inherently gritty, it has somehow managed to make it all seem sublime. The first 15 pages of the latest annual report are given to full-page, glossy pictures of the Auckland environment, each with a message.

Team New Zealand's black boat is shown passing through the viaduct. Why? Because if Waste Management had not removed tens of thousands of tonnes of contaminated material from the Viaduct to its Redvale landfill, the Viaduct would still be a dockside disgrace.

As investments go, Waste Management has had its ups and downs. Last year to end December 2002 was a year of recovery, taking the sting out of the disappointment of 2001, when its Auckland disposal revenue was hammered by the arrival of a new price-cutting competitor. Pricing returned to normal levels last year and the company's net profit after tax rose 15% to $15.0 million on a 6.4% rise in sales to $163.3 million.

"The long-term earnings curve has re-established its upward momentum," says managing director Kim Ellis, who then adds a reality check.

"The improved performance was underpinned by the anticipated recovery in the Auckland collection market. But the reality is that two years on from 2000 we are only 5% ahead.

"For this, the market has understandably punished the company's share price. Therefore our overriding objective must be to overcome the market's concern about our ability to generate sustained earnings growth ­ not with optimistic projections but by delivering, six months by six months, hard evidence of performance."

However, some of that evidence started arriving last year. With its Auckland revenue base fairly mature, Waste Management has looked overseas for growth opportunities.

In 2002 it bought three waste businesses in Australia to establish a base for the future. Not everyone was convinced this would work but in the report Waste Management says Brisbane-based Barkoola Environmental "exceeded expectations." And earnings growth continued into the current year.

In total, the Australian operation contributed pretax earnings of $4.6 million last year, on sales of $21.1 million. The operating margin of 21% for Australia is still well below the 33% for New Zealand and shows its Australian business has some way to go. But already, it's exceeding many investors' expectations.

The outlook for Waste Management is for moderate growth, potentially picking up beyond 2003. "The collection business is expected to secure a modest lift in earnings with upward movement in price and volumes," Mr Ellis says. And Australia should produce "a useful lift in earnings as operating wrinkles are ironed out and new business is secured."

Beyond 2003, strengthening Auckland disposal prices, a new Canterbury landfill and its expanding Australian business should drive its earnings higher.

Two projects could accelerate that growth. The first is an option to acquire a landfill site in Adelaide, which involves many complexities still to be worked out. And the second is its Asia strategy. With a Chinese partner, the company is involved in projects in Beijing and Guangzhou while it carefully tests the water.

Waste Management is not given to hype. But at a time investors are extremely critical of companies that don't deliver, there's nothing wrong with a bit of modesty. It is well placed to deliver real growth over a fairly long time.

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