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Covanta 1Q21 results +4

09:51 30-Apr-21

The Covanta conference call has just concluded but it didn't add much clarity.  The CEO spent much of the script describing what we already know as if it were new.  Covanta is (still) looking to rationalize and downsize it American business against the more lucrative upcoming U.K. operations.  At a macro level, what's happening here is that Covanta is getting eaten alive by the difference between real inflation and the Fed's bogus numbers on which its contracts are escalated.  To put some numbers on that, 18 facilities are owned by municipalities and Covanta is the operator.  The company plans to try to renegotiate many of those contracts and let them expire if it can not.  It has already identified several that it will allow to expire, but that's a process that will take up to 7 years. 

I remain skeptical about plant operation over that time frame, since apart from the doubling in revenue from metals, most of this quarter's gains were from lower maintenance.  Much of that will need to be made up in the coming quarters and to the extent that it is not I think we can expect to start seeing one-off problems again.  For its part, Covanta plans $15-20M cost savings this year, and $30M by the end of next.  Some of this will be voluntary retirements, and it will be excluding the associated one-time costs.

Covanta also reiterated that it will be looking to sell off some of its 21 100%-owned WtE plants in North America.  I think it will be able to do this, but I have serious doubts about the result being a more valuable company.  I'm even more dubious that shareholders will benefit from the transition under new management.  Instead, debt reduction is the main thing that will be happening, with targets for <5x Debt to EBITDA by 2022, 4x longer term.

On the other side of the pond, plans are proceeding well.  Rookery should be receiving waste within weeks, and will ramp to full operations over the course of next year.  Covanta is also seeking to expand the permit for Dublin throughput by 15% to realize fully designed capacity with minimal extra expense.  Similar to my concerns on American maintenance, I'm not sure it's as simple as that, but such is new management.

CVA is up about 4% to $14.50 as, in my opinion, investors fail to think through many of the implications of the still unspecified transition.  Waste remains a largely unsolved problem, and if renegotiation of existing contracts actually can be favorably renegotiated and owned plants can be operated more efficiently over the long term, then maybe there still is value here.  The yield dropping to 2.2% doesn't make me want to stick around to find out, though.  I'll continue to track the company, but will be hands off and brief in my commentary until it manages to split off the European assets, or positively surprise in North America.

Covanta has published its first quarter results:

• a penny of EPS beats by 13 cents
• from $498M of revenue, which beats by $17M
• FY21 guidance upped to $140+/-15M of FCF fand $470+/-10M of EBITDA
  

Metals helped, as expected.  To be honest, though, this big a beat on the middling increase in revenue makes me even more suspicious about unsustainable cost cutting in operations, and that's only enhanced by this quote from the new CEO:

We are instituting a comprehensive overhead cost rationalization program to rightsize the level of support required for the business. In addition, we continue to explore third party interest in discrete assets and develop plans to address underperforming operations

The conference call is at 8:30am tomorrow morning.  We'll see what there is to hear.

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