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The Shoeshine Column: Australia ahoy for liberated Waste Management

Friday 7th April 2000

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There's gold in that thar trash

Some years ago, the story goes, an American magazine ran an article on US firms it reckoned were Mafia-controlled. Among these was Waste Management Inc, the majority owner of our local outfit Waste Management New Zealand (WAM).

Both companies denied the allegation vehemently. At the next annual meeting in Auckland shareholders filed in to find three unfamiliar faces at the directors' table. The chairman introduced them.

"Ladies and gentlemen, I am pleased to welcome today three representatives of our US parent company - Mr Sonny Bonnetti, Mr Luigi Corleone and Mr Carlo Bonaventura."

Shoeshine doesn't vouch for this yarn. In any case the issue for investors weighing up the offer of Waste Management Inc's 57.5% stake is not so much where WAM has been but where it's going.

Newspaper advertising of the offer highlights what has unarguably been an impressive track record. Over the past 10 years the company's average annual profit growth has been 21%.

On an earnings-per-share (EPS) basis the picture looks less impressive but still commendable. Since 1995 EPS has grown by an average 11%, from 8.8c to 13.6c.

The different rates reflect that WAM has a lot more shares outstanding after two bonus issues and a rights issue. These have helped the company triple its assets, from $80 million in 1995 to $238 million last year.

The offer's $3.30 to $3.80 indicative price range was arrived at by reference to market trading, with some upside built in, and looks generous. And it's timely given investors have started shopping around for heavily undervalued "old economy" assets.

But following last year's $115 million Waste Care acquisition, WAM is now the largest operator in its sector and competition has been increasing. Can it keep the growth up?

One effect of the sell-down is WAM is freed to set up operations in countries previously off limits because the parent was already there. The most obvious candidate is Australia.

Managing director Kim Ellis is known to be keen to cross the Tasman when the time is right. But don't expect the company to go charging into the big centres in head-on competition with Brambles.

Both chairman Alton Jamieson and director Graeme Bowkett have held executive positions with Pacific Waste Management Pty and know the Australian market well. The most likely entry route is a cautious and gradual rollout in the smaller centres.

So shareholders shouldn't expect big profits - or losses - from Australia any time soon. What about New Zealand?

In the solid-waste collection and disposal markets WAM competes with two big operators - EnviroWaste, a joint venture between Fulton Hogan and a subsidiary of the Auckland Regional Services Trust, and Onyx Group, owned by French-based multinational Vivendi.

Around 80% of WAM's revenue comes from collection. In the key Auckland market the three big players compete vigorously for council collection contracts, ensuring margins are low. The money's in disposal.

WAM's Redvale landfill is its biggest asset in terms of capital expenditure but more importantly it has resource consents to operate until 2023. It is operating below capacity.

Its two major competitors - EnviroWaste's Rosedale and Greenmount sites - are expected to close in 2002 and 2003 respectively. A bitter stoush is brewing as the main players jockey for volume share and new landfills.

In this game the key to making a living is the degree to which players can maximise margin on both collection and disposal by "internalising" - dumping your volumes in your own facilities. And WAM is 100% internalised, giving it an edge none of its competitors has.

Outside the main centres, councils have been struggling to retain their own collection/disposal services but they are losing the fight to private operators, notably WAM, with big-scale economies.

Green politics are also playing a part. For one thing, environmental considerations are making landfills, particularly small ones, increasingly expensive to build and operate. WAM sees its expertise and technology as a competitive edge and it has embraced the green cause to good commercial effect.

It has succeeded in getting some competing projects junked because they don't make the grade.

The Labour-led government wants the solid-waste stream reduced 40% by 2010. That might sound like bad news for the likes of WAM but it isn't. Given waste volumes are increasing inexorably the cut can be made only by greater recycling. That's far more profitable than just dumping the stuff but it's a game only integrated players with scale economies, expertise and technology can play.

WAM also sees big opportunities coming up in water and waste water services. Again, councils have been reluctant to let the business go and WAM has only three contracts.

But hefty capital requirements and Resource Management Act strictures are slowly forcing councils' hands. WAM has imported expertise through a co-operation deal with the UK's Anglian Water.

Another, new-age, growth area is organic recycling. WAM has jumped in on the ground floor with a joint venture with Wellington City Council. Called Living Earth, it takes sludge out of waste water and makes it into compost for sale to market gardeners, orchardists and others. (Think about that when you're next crunching a braeburn.)

WAM's progress hasn't gone unnoticed by the market but it's only now moving into the big league. Its increased size and the liquidity boost afforded by the parent company selldown should propel it firmly onto institutional radar screens.

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