Top waste stocks to watch
The world’s waste problems are only getting worse, but the opportunity to turn waste into an asset has never been greater. We have a look at the top waste stocks listed in the UK.
The world of waste
Waste is a growing problem for the world. Burgeoning populations and urbanisation mean the world is on track to produce over 3.4 billion tonnes of waste annually by 2050, up a staggering 70% from the 2 billion tonnes produced in 2016. ‘Urgent action’ is needed to avoid this, according to the World Bank.
And while waste is still a huge burden for counties around the world with the vast majority of rubbish still being sent to landfill, the opportunity to turn it into an asset has never been greater.
A wide range of companies are trying to tackle the challenge in numerous ways, whether it be by increasing the amount that can be recycled, creating more biodegradable plastics, or converting waste into energy and fuels that can help power a world that is trying to tackle climate change.
Figures from Statista suggest the global waste management market, covering the collection, transportation, processing and recycling of rubbish, will be worth $530 billion by 2025 – 60% higher than 2017.
The fundamentals of the market are strong. Waste is a huge problem for developed nations, which produce far more waste than the developing world despite accounting for a fraction of the population. The need to reduce and recycle waste has never been greater, and although recycling rates have improved markedly, they still only reuse about one-third of their waste.
Meanwhile, waste will continue to become a growing issue for developing nations as their populations rapidly grow and more people move into towns and cities.
For example, Sub-Saharan Africa is expected to produce three times as much waste per year in 2050 than it is now, and only 4% of waste is recycled in low-income countries. There will always be waste and, unless we want it to sit in landfill, those companies that are finding uses for it are onto a long-term winner.
The coronavirus crisis could propel the industry forward. Many countries, including the UK, have realised there is an opportunity to ‘build back better’, investing more into green projects and infrastructure that can not only heal the economic wounds of the crisis but push them closer to their climate goals.
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Top waste stocks to watch
The UK is home to some of the largest and most advanced waste companies in the world, and there is a wide variety of waste stocks to choose from listed on the London Stock Exchange. Many of the larger firms operate on a global scale and compete against other major European outfits (such as Veolia and Suez) and some American firms (like Waste Management Inc). But there is also a swathe of smaller stocks that are trying new things with waste and hoping to disrupt the market.
Top waste management and recycling stocks
Waste management is at the heart of the industry. It covers the traditional players that collect, process and store waste from commercial premises and households, and those that collect more difficult materials like industrial or hazardous waste. It also covers the recycling sector that is desperately trying to find uses for as much waste as possible.
Biffa is a familiar name in Britain. It is one of the largest waste management companies in the country and, unlike many of its rivals, it solely concentrates on the UK market. It has nearly 200 sites across the country and its municipal division alone collects 4.3 million bins every week. It is also the largest collector of commercial and industrial waste.
Together, these activities account for about 75% of its revenue, with the other 25% coming from its newly established Resource & Energy division that focuses on processing recyclable materials and generating energy from waste.
The fact it has such vast access to waste means the opportunity for Biffa is considerable if it can find good use for as much of it as possible. The company has delivered strong rates of both organic and inorganic growth since 2014 and has acquired more than 40 businesses – a strategy it continues to grow market share and expand.
Biffa was previously owned by water outfit Severn Trent but was then bought out and privatised in 2008 before going public again in October 2016.
The company has remained resilient throughout the coronavirus crisis, although it has, like most others, suspended the dividend. Collections from factories and commercial premises has been hardest hit by the crisis, but its municipal and other divisions have helped partly offset any weakness.
Annual revenue in the year to 27 March, 2020, rose 6.6% to £1.16 billion and better margins meant pre-tax profit more than doubled to £56.4 million from £21.5 million.
Renewi was formed in 2017 when UK outfit Shanks Group merged with Dutch firm Van Gansewinkel Groep, creating a force in Europe where it has 174 sites. The Benelux – home to Belgium and the Netherlands – is at the heart of the business and contributes 85% of revenue, with the UK being its next biggest market and supplemented by smaller operations in France, Portugal and Hungary.
Much like Biffa, it collects waste from companies and factories but, unlike some of its peers, it recycles the majority of it. In fact, nearly two-thirds of everything Renewi collects is recycled, which it says is the highest rate in the industry.
It owns the waste it collects, so turning it into useful products makes business sense. It makes everything from paper, metal and plastic to glass, compost and energy. Ultimately, this means it not only manages waste but also a producer of raw materials. It says it is the largest waste-to-product company in Belgium and the Netherlands, and it also has a smaller division that produces electricity from waste to power 15,000 homes in Amsterdam.
Renewi is aiming to further improve its recycling rates and improve the quality of the products it makes. It has also said it is willing to ‘selectively gain market share’ through acquisitions or geographical expansion.
Renewi has delivered steady top-line growth since being created. Revenue increased from €1.64 billion in its 2018 financial year to €1.67 billion in 2019 and €1.69 billion in the most recent 12 months to the end of March 2020.
Still, while it has managed to stay in the black on an underlying level, it has reported pre-tax losses for at least two straight years, and the coronavirus crisis has prompted it to suspend dividends so it can hoard cash and lower debt.
DS Smith is primarily a packaging company that helps sectors like the fast-moving consumer goods (FMCG) develop better packaging solutions for their products. However, it makes it onto this list because it is Europe’s largest cardboard and paper recycler. DS Smith follows what it calls a ‘supply cycle strategy’ that aims to provide an end-to-end service that collects and recycles paper and cardboard and turns it into new products before starting the entire process again.
That means the paper and cardboard it produces goes back into the system and is reused over and over again to create a ‘real closed loop recycling solution’. This also means DS Smith is not only a vital partner for companies that produce a lot of paper-based waste, but also for those looking for more sustainable packaging.
DS Smith operates in 37 different countries but is centred in Europe, which accounts for nearly 90% of revenue with the rest coming from North America. Big name clients include the likes of Tesco and Pets at Home.
The coronavirus crisis has caused some problems for DS Smith. Orders from industrial customers, such as the automotive industry, has been hit, but it has benefited hugely from its exposure to the FMCG and e-commerce sectors, both of which have remained resilient.
‘In the medium term, the growth drivers of e-commerce and sustainability are as strong as ever. The Covid-19 crisis is also expected to accelerate a number of the structural drivers for corrugated packaging and our scale and innovation led customer offering positions us well and gives us confidence for the future,’ said chief executive Miles Roberts in July.
DS Smith has also prudently suspended dividends amid the crisis, but it has continued to deliver solid results. Annual revenue in the year to the end of April 2020 dipped to £6.04 billion but better margins – a primary focus of the business at present – meant pre-tax profit crept up to £368 million from £350 million the year before.
Augean is for those looking for a more niche opportunity. The small-cap company, boasting a market cap below £200 million, operates in the UK and concentrates on more hazardous waste that needs to be disposed, treated or recycled under stricter regulations and controls.
It offers a wide variety of services. It provides specialist bins for contaminated materials, which it collects and handles on behalf of customers. For example, it has a growing business that manages the ash waste created in biomass and waste-to-energy plants.
It also turns the gas from its landfill sites into energy, and provides landfill and soil treatment services to a wide array of clients, including the nuclear, oil and gas, construction, and chemical sectors.
It has a small business providing limestone aggregates to the construction industry, and a business serving the North Sea oil and gas industry with the likes of decommissioning work and managing the waste produced when drilling new wells.
The company operates in many niche areas, but this means it has less competition and a diversified business model. Its North Sea oil business is one of the fastest growing parts of the business and expected to become a larger part of Augean going forward.
Augean is a fast-growing business. Annual revenue in 2019 soared to over £107 million from under £80 million in 2018, but it sank to a hefty pre-tax loss after being hit by landfill tax charges. However, excluding those tax assessments, Augean would have delivered a huge improvement in profits year-on-year (YoY).
Velocys was formed to commercialise technology that was spun out of Oxford University in the UK and the Pacific Northwest National Laboratory in the US. It has developed a reactor that allows waste to be converted into syngas, and then into fuels like diesel of jet fuel. This means it can provide an end-to-end process that turns waste into a finished product.
The fuels it produces mimic existing ones, meaning they can be used by planes or vehicles without having to make any changes. Ultimately, this means it can provide fuel that produces significantly less carbon emissions than traditional ones. It has already proven its technology can work on a commercial scale and is now ramping up efforts to bring it into the real world.
This is being spearheaded by the Altalto waste-to-fuels project in Lincolnshire, which will be the ‘first commercial scale sustainable aviation fuel facility in the UK’ that aims to convert hundreds of thousands of tonnes per year of residual waste into sustainable aviation fuels. Importantly, the project is being developed with two formidable partners: British Airways (part of airline group IAG) and a subsidiary of Royal Dutch Shell.
Velocys generates revenue by licensing out its technology to the companies that want to use it, but it also sells the catalysts needed to convert the waste into an end product. This means, once it has secured a customer, it has a steady stream of recurring revenue over the long term.
The company is on the cusp of becoming a commercial business. Having reported minor revenues and a wider loss in 2019, Velocys shareholders will be hoping the company can start generating material income in the near future.
Powerhouse Energy has designed technology that allows energy to be recovered from unrecyclable plastic and old tyres by converting it into a synthetic gas that is similar to natural gas.
This can then be used for electrical power generation or to create hydrogen. This puts it in the same ballpark as Velocys, although it doesn’t get involved in the conversion of syngas to the actual end fuel product like its peer.
The company is also on the verge of moving from the research and development phase to commercialisation, underpinned by its first deal to licence out its technology to Peel L&P, which will be responsible for drumming up customers for Powerhouse’s technology such as ‘councils and waste management companies’.
In return, Peel will pay Powerhouse £500,000 each year for every site that is created. The first site that will use Powerhouse’s technology is already in development, and a second one is expected to be announced before the end of 2020.
Powerhouse has given Peel L&P exclusivity in the UK and expects to use this same model in other countries around the world. If successful, it will simply licence out its technology to those who can put it into action and collect the annual fees for each site. It is a lean model that could offer huge rewards.
EQTEC (formerly REACT Energy) is in a similar position to Powerhouse Energy, having also developed technology that allows waste and biomass to be converted into syngas, which can be used to generate electricity.
It targets companies that produce large amounts of waste to give them the opportunity to either make use of it or sell it into another plant. EQTEC acts as a middleman between waste owners, financiers and other stakeholders to help build projects where they are needed, while supplying the technology, advice and (sometimes) an equity investment.
The company has stepped up to a new level this year. Contracted revenue in the first three months of 2020 stood at €2.35 million – compared to the €1.6 million booked in the entirety of 2019. It currently has a number of projects in development in Spain, Bulgaria, Italy, Croatia and Poland.
Its focus on creating syngas for electricity generation means it is a player in the renewable energy space too. It hopes it can encourage authorities and companies to treat their waste as an energy source and believes this underpins the need for its technology.
Symphony Environmental: an alternative waste stock to consider
Last on our list is Symphony Environmental Technologies, which has developed various technologies for plastics. The first range, d2w, covers technology that helps make products, such as plastics, more environmentally friendly by making them biodegradable.
The second range, d2p, covers a suite of masterbatches for plastics that provide extra protection for packaging, such as a pest control measure or flame retardant.
Mexican outfit Grupo Bimbo, the world’s largest bakery firm, is among those that are using Symphony’s products. It is worth noting that it also sells traditional, non-degradable, flexible plastic products, which may reduce the appeal to some ethical investors.
It sells its products directly to customers but is increasingly getting it out there through distributors and agents, which is a quicker, cheaper and easier way of expanding the reach of its offering.
The company reported a dip in revenue and sank to a pre-tax loss in 2019, but has already suggested that 2020 will be a year of progress. Revenue in the first three months of the year was up 53% and it has said that it has ‘not been materially affected by Covid-19’.
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