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Covanta 3Q18 results ?3

10:05 26-Oct-18

The Covanta conference call has just concluded.  Operationally, this was a good quarter.  Fairfax and several other plants performed at or near record levels.  Tip fees increased by over 4%, Environmental Services by 9%, and profiled waste revenue by over 10%.

Management is looking at opening up more plants to profiled waste, but with differing levels of suitability, that analysis is somewhat tricky.  The company is still waiting on final permits for ash processing in Fairless Hills, but expends to be underway with the $20-25M initiative next year.  The culling low end American plants is more than half done, but will continue.  Management cited the plant improvements as part of an amended Long Island contract as a model for how it would like these decisions to proceed.

The ancillary businesses offset one another, with metals making up for weak energy prices.  2019 energy sales are being hedged at roughly the same levels as this year.  HMS is at $313, and management's outlook increased to $300-325 for the fourth quarters.  Non-ferrous pricing reduced slightly, mostly due to aluminum, and that weakness will probably continue.  Note that these puts and takes were merely +/-$2M, vs +$26M and $11M the revenue and EBITDA lines for the core business.

Development and the transformational nature of the GIG partnership are just starting to shine.  Covanta will be taking a 25% equity stake in Scottish GIG plant opportunity with a long-term energy supply contract, which is expect to close for around $20M sometime next year.  Additional opportunities are being evaluated, first in the Philippines w/ Macquarie, and perhaps later in places like the Middle East, India, or China.  In the meantime, we can expect a court decision on Rookery shortly, to be followed by financial closing in 2019.

Financially, all this growth will take its toll on EBITDA, which is expected to be flat next year.  However, FCF is expected to rise to over $130M (from $70-100 2018 guidance), which covers the dividend.  Management still targets growing that figure to over $250M by the middle of the next decade.  Consequently, I think current market reaction represents an opportunity that is unlikely to still be available in the years to come.

Covanta has announced its earnings for the third quarter:

• a loss of 4 cents misses by 12 cents
• on revenue of $456M, which beats by $4M

Management has affirmed full-year EBITDA and FCF guidance and everything seems okay operationally.  It looks like the big miss is the result of the charge on the Palm Beach transaction that I mentioned earlier, which should be ignored.  The stock hasn't moved so far after hours and the conference call is not until 8:30 tomorrow morning.  I will update again then.

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