Cleanaway Delivers a Solid 1H20 in Contrast With Soft Prior Guidance but Shares Remain Expensive

No-moat Cleanaway showed greater resilience to softening Australian economic conditions in first-half fiscal 2020 than we’d anticipated. Earnings grew in spite of management’s warning in October 2019 of a soft start to fiscal 2020 that would likely result in flat first-half EBITDA. The solid waste segment--Cleanaway’s largest at 70% of operating income excluding corporate overheads--posted a strong underlying result with growth in organic volumes achieved despite concerns of economic malaise. With solid waste volumes less challenged in the current environment than we’d previously anticipated, we’ve upgraded our full-year fiscal 2020 EBITDA forecast by a minor 0.5% to AUD 479 million. Our revised forecast sits toward the top end of Cleanaway’s full-year fiscal 2020 EBITDA guidance range of AUD 471 million-AUD 481 million, excluding the earnings benefit from changes in IFRS accounting standards for operating leases. However, we continue to expect a five-year EBIT CAGR of 12%, leading us to retain our AUD 1.70 per share fair value estimate. While we continue to expect strong growth in operating earnings, we regard Cleanaway shares as overvalued.