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Covanta & MagnaChip 2Q20 results +3

10:00 31-Jul-20

As usual, there was a lot of good color available in the Covanta conference call.  The executive summary is that, although management sees the core waste business recovering, it remains challenged and is expected to remain below previous volumes for the remainder of the year.  See further detail in the breakdown below.  This is being mitigated by cost cutting and good management, but the low hanging fruit has already been picked there.  Maintenance costs will increase for the remainder of the year, and management acknowledges that it could see negative free cash flow in the second half.  Here are the details by segment:

• Waste: tip fees were down by $4-6 per ton, that has improved steadily to being down just $1 per ton now.  Covanta has sort of lucked out geographically in this respect in that this is reflective of the better pandemic response in the American northeast, whereas Florida is service fee payment.  By contrast, Environment Services is down 10-15% and that remains steady.  I note that some aspects of waste processing, like chemicals and pharmaceuticals, are positively impacted by the pandemic, but those wouldn't really ramp until we have a vaccine, which is not this year.
• Metals: as already mentioned, prices were surprisingly low.  This may just be timing, but I also have to wonder if there is some disruption from TAPS development, which I discuss below.
• Energy: For now, Covanta is benefiting from contracts which are almost 4x the market rate.  These begin to expire in 2024 and constitute almost a third of energy sales.  Hedging is currently 58% of energy revenue, but 2021 is 41% hedged and at prices similar to 2020.  That much is good, but I note that hedging is down from 75% in 2015, when I reinstated coverage, and overall revenue from energy is down to 18% from a third.  With natural gas at $1.83, this remains a big concern going forward, as I no longer expect a big rebound in energy prices around in the next few years. 
• Development: The mess in the U.K. required Covanta to spend $8M to buy Protos land.  That should be reimbursed on financial close late this year.  As a reminder, contribution from other U.K. projects should begin in 2022.  A similar amount remains to be invested in TAPS this year.  The company is still testing and commissioning.  First sale of aggregate and sand to either asphalt or cement companies will be a milestone.

In summary, I continue to see CVA as overpriced, despite the stable, well-run core business.  Management has stabilized debt, but is not providing guidance.  The market is taking this report well, but it's hard for me to see how this isn't as good as it gets for Covanta in near term.   I'll add that Europe just reported its worst contraction ever, and big oil companies are reporting record losses.  Although Covanta is, at its core, the most stable and reliable of businesses, it is still correlated to local economies.  That's not a good thing while the pandemic lasts, and the explosion of public debts will still be a drag even afterward.

Covanta has published its second quarter results:

• a loss of 10 cents per share beats by 9 cents
• from $454M of revenue, which beats by $3M

It looks like the core business is recovering, but still down from normal levels.  I also had hoped for a little better performance from metal sales.  CVA is up over 5% in response, but I still see shares as overvalued for the short term.  The conference call is at 8:30am tomorrow morning, and I will certainly write more after that.

In the meantime, I'll also document MagnaChip's results:

• 13 cents of EPS beats by 6 cents
  
• from $118.8M of revenue, which is in-line
• guides 3Q20 revenue to $121+/-3M which misses by $8M

The real question here is what MagnaChip does next.  The new board member could indicate future M&A, but I see shares as fairly valued right now.  The conference call begins shortly, but I will only write further if there is some surprise.

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