CIBC Capital Markets on Monday had an outperformer rating and a C$77 price target on the shares of GFL Environmental (GFL.TO), after the company and SECURE Waste Infrastructure (SES.TO) announced they have entered into a definitive agreement.
CIBC noted that GFL's shares were down approximately 10% on the back of the announcement despite GFL expecting the acquisition to be EBITDA- and FCF-margin accretive.
According to CIBC, a key concern it heard from investors is how this proposed acquisition of SES reshapes GFL's portfolio, noting the company has spent the last few years transitioning to more of a pure-play solid waste company, having spun out GIP and Environmental Services (ES).
CIBC said that while SES is not a solid waste company, its financial metrics are "strong and stable." It further said that SES has a disposal-centric operating model which does "align well" with GFL's solid waste segment.
"More importantly, GFL emphasized that it has no intention of expanding further into E&P-centric industrial waste through additional M&A, describing SES as a unique, one-off opportunity," said CIBC. "We would also highlight that what has anchored GFL's strategy are its long-term financial targets. From that perspective, the acquisition of SES drives GFL closer to hitting these goals."
While addressing key investor questions regarding the transaction, CIBC also stated that given SES's exposure to the energy sector, there is a concern that its earnings stream is "significantly more cyclical" than solid waste.
CIBC noted that near 80% of SES volumes are tied to recurring production related waste streams rather than drilling activity, which the bank views as "significantly more stable across commodity price cycles."
"We look back at SES's financials to highlight the durability of its EBITDA through various commodity price environments," added CIBC.
It further noted that, on a pro-forma basis, GFL estimates that revenue directly tied to E&P activity will represent roughly 10%-12% of consolidated revenue by 2027. CIBC said that while the SES EBITDA stream does exhibit some level of "incremental cyclicality versus legacy GFL", CIBC said that it does not expect this to "materially impact consolidated earnings volatility." CIBC added that, with GFL noting incremental M&A will be focused on the solid waste space, this will further dilute the contributions from the energy waste stream.
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