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Covanta 3Q19 results +2
09:21 25-Oct-19
The Covanta conference call has just wrapped up. I've put my
notes together with info from the presentation
to provide the following operational overview by segment:
- Waste: Record waste service performance more than offset somewhat higher maintenance spending due to Palm Beach. Regulated medical waste revenue also grew by over 40% and management sees this as a strong source of future growth. TAPS is being optimized and full commissioning is delayed until next year, resulting in additional spending this year and next, but planned permitting for other sites has begun. Full TAPS coverage should take 4 or so years. In the U.K., Protos should still reach financial close this year, and Newhurst in 1Q20.
- Power: prices stabilized at historically low levels.
Energy is over 95% hedged for 2019, and about one third hedged
for 2020 so far. Furthermore, current contracts in this segment
extend until 2024, with rates over 250% of the current market,
insuring at least another third of the current Energy revenue
levels. Looking further out, new types of energy contracts,
such as direct sales, are being considered as well.
- Metals: Ferrous was down over 25% YoY, and non-ferrous over 20%. Revenue from non-ferrous is climbing and expected to equal ferrous going forward. Consequently, Covanta has begun quoting and estimating Old Cast Aluminum Scrap (at $0.37/lb) in addition to HMS (at $192/ton). Most of this is being driven by policy changes in China, but the situation in Turkey is also having impact on HMS. Improvements in separation of heavy metals via unique color-sorting technology will gradually mitigate the overall metals pricing impact as well. There was no further discussion on hedging metals, but I will put a question into the company.
There's been a lot of nonsense published about this company, but
despite increasing leverage and a high payout ratio, I view the
dividend as safe. Despite the macro challenges, FCF and cash on
hand are both greater than at any point in the past 3 years. Over
the longer term, Covanta has some wonderful growth potential
including sourcing green
cement from TAPS, profiled waste, syngas,
U.K and other international growth.
Covanta has published its third quarter results:
- 10 cents of EPS is in-line
- from $465M of revenue, which misses by $3M
Estimates had been dropping from the figures I originally quoted, and management also affirmed guidance and the dividend. I've yet to see a decision from the E.U. on a Brexit extension, but it's difficult to imagine what could go wrong with the rebound in CVA that is already underway after hours. As expected, commodity prices, particularly for metals, were challenging but the core business made up for that. The conference call is at 8:30 tomorrow morning. More after that.