Ann: Market Update, page-48

Been looking at this fairly closely. Potentially good buying sub 30c but not without risk and my base case price target doesn't seem to give me enough room for error on a 12 month view.

By that I'm getting a target range of 33c to 38c, which is reasonable, but generally at this end of the market I need a higher expected rate of return to compensate for the small cap risk. There's both upside and downside scenarios on these but I'll leave that for another day.

A few points to add to the discussion. It's worth remembering that there are really two businesses in CLG. There's the recycling or what they call resource recovery and then there's the packaging business.

One challenge is that it can be very hard to maintain EBITDA margins >20% in these businesses. They are capital intensive, input prices can be volatile and customers are always looking for the best deal they can. There's also a lag in passing on rising costs to customers. So not an easy business to run.

If we look back to FY2020 from the CLG initiation report, Shaws provided this table. Focus in on both the historical and forecast EBITDA margins. They're still pretty good margins for this industry but they're not >20%, which is the challenge.



If we look back at guidance the group is forecasting $200m revenue and $43m EBITDA. This implies an EBITDA margin of 21.5%.

Segment analysis in FY2023 showed the following. Recycling EBITDA margins were 16.2% and Packaging 20%.


In the last investor pack they broke down the FY2024F revenue contribution




Now if you scan back up you will see that the fast growing part of the business also had a lower margin. But there's a few moving parts here, probably lots of one-off costs so you could argue there will be growth here.

But if we want to back solve for the growth required, we can start with packaging. This is a reasonably simple business. It generated an EBITDA margin of 20%. This is higher than global comps and higher than historical levels. So I think it's fair to keep it consistent (or even lower). To keep it simple, let's use 20%.

If we use a 20% EBITDA margin and back solve for guidance then it works out to something like this.
Basically, recycling REALLY needs to smash it out of the park to hit guidance. Now with all the mini businesses in the group it's difficult to form a view whether it's achievable or not - management seem to think so, but the point is it's not without risk and to MEET guidance Recycling needs to improve EBITDA margins YoY by 620 basis points






The other challenge is that while recycling ticks the ESG box, packaging just isn't sexy and market multiples are near all time lows.

Macquarie recently provided a great chart in their Orora note (below). Now there are a range of packaging businesses that have their own nuances but the point is the global multiple ascribed to the peer group has been falling and is now 10x.

These businesses on 10x have significantly more scale, scope, expertise, history, better customer relationships etc etc. So if they're trading on a PE of 10x then I struggle to rate CLG on a higher multiple for that part of the business. I'm discounting that 15% with a 8.5x PE.


Now to get to PE we have to get to NPAT. Shaws which is the only broker I know that covers the stock has FY2024 NPAT of $16.1m. I get $15.7m, so let's call it $16m.

SOI is 519.7m plus another 5 million shares that vest in 5 weeks. $16m NPAT on that SOI gives me EPS of ~3c and on today's close the FORWARD PE is 9.7x, which is cheap by normal standards but potentially not cheap enough. Also, remember that I'm not really comparing apples with apples. For CLG I'm using the forward PE and in the above chart it's the present PE.

So another way to value this that I think is more appropriate than a simple EV/EBITDA would be a Sum of the Parts.

To start, I need to work out the difference between forecast EBITDA of $43m and forecast NPAT of $16m, which is $27m. This covers D&A, tax and interest.

What I have done is apportion the $27m by expected EBITDA contribution and applied what I would consider appropriate multiples for a small cap.

I'm using 8.5x for Packaging, a discount of 15% on the global peer average and 12x for recycling. I've opted for the higher multiple for recycling as it ticks ESG, is higher growth but is still discounted below the broader market as it's still a small cap. On today's close of 29.5c and using this lens, the 12 month valuation comes to 33c and probably not enough to get me excited (yet). Still watching it closely though.