--- the subscriber area has no ads and those above are not selected or endorsed by this site ---


Covanta 2Q19 results ?4

09:47 26-Jul-19


The Covanta conference call has just concluded.  Although sharp power price declines did figure into the EBITDA forecast reduction, that has a dollar for dollar correlation to FCF, and a strong waste market in the northeast, plus working capital levers is making up for the difference. The extension of contracts in Boston & Philadelphia, to 2024 & 25 respectively, with CPI escalators were given as current market examples, but are not included in the waste processing growth figures to date.

The volatility in power prices raises some concern on forward hedges, two thirds of which is still exposed for 2020.  However, renewable load serving agreements, such as the one inked in NJ, microgrids arrangements & selling steam are all higher value than selling electric to the grid.  Management even mentioned selling power to directly to crypto-miners, and it is pursuing all manner of alternatives.  I now have one more reason to keep an eye on natural gas prices.

Metals pricing was just as big of a concern, with HMS prices dropping from $320 to $130-160 per ton now.  As a result, management's FY estimate is revised to $175 per ton, but its guidance is based on actual prices, even though the scrap market is expected to recover.  The company is now processing almost all non-ferrous and a third of ferrous input, but it is stock piling non-ferrous in order to realize better better prices once new equipment installed.

Looking further out, management expects no more near-term divestitures, but it is hopeful for its international project pipeline.  It reiterated that 3M tons of waste is shipped to continental Europe from the U.K. which adds pressure on processing prices, especially with Brexit looming.  New regulation in the Netherlands, which receives 43% of that, could accelerate that effect. As a result it sees more U.K. deals on the way, and development in the Philippines is waiting on the finalization of a concessions agreement, with China also warming.  Finally, TAPs is still expected to come on line and add value, but I will have to continue to monitor the outlook for green cement in order to really quantify the impact.

All in all, this quarter details a tough macro environment, but the benefits of investing in a business that the world needs with excellent management.  I find opening prices around $16 quite compelling, especially since management explicitly affirmed its dividend policy even in the event of an FCF shortfall.  To me, this is clearly a situation where long term opportunity outweighs short term risk and I will be jumping on it, after having sold some shares above the $17.50 level which I had labeled as a pivot point.  I hope others are also able to benefit.

On 7/25/19 4:36 PM, Esekla wrote:

Covanta has published its second quarter results:

  • a loss of 16 cents per share misses by 11 cents
  • from $467M in revenue, which beats by $1M
  • FY19 EBIDTA guidance is lowered by $20M to $432.5+/-12.5M

The adjusted EBIDTA guidance is due to commodity prices, but Free Cash Flow guidance remains unchanged at $132.5+/-12.5M, which is better than 20% YoY growth.  I am assuming the disparity is due to accounting surrounding fuel hedges.  Everything else seems to be on track, with 5% increase in tip fees and affirmation of U.K. development plans. 

It's FCF that should matter and which keeps the dividend safe, so I find myself hoping the market misreads this and gives us a new CVA buying opportunity around or below my $16.67 original price target.  Shares had been pricey but have only traded about 1% lower after hours, and not in a way that indicates any clear direction.  The conference call is at 8:30 tomorrow morning.  More after that.