Cleanaway Waste Management recently entered Mirrabooka’s list of Top 20 investments. Mirrabooka bought into Cleanaway in 2019 and since then has been adding to its holding. Mirrabooka portfolio manager Kieran Kennedy explains Mirrabooka’s thinking about Cleanaway.
Cleanaway is an essential service but…
The first attraction of Cleanaway is that the company provides an essential service – waste management. The business ticks along every day no matter what is happening to the economy.
Despite that attraction, historically, companies in the waste disposal industry haven’t generated very high returns because barriers to entry have been low. One needed only to obtain a fleet of trucks, pick up waste, and dump it in a landfill. So, although Cleanaway operated on a large scale, it couldn’t extract much of a competitive advantage in such an environment.
Cleanaway is now well placed in a changed environment
In the last five years, two factors have changed the waste disposal industry to Cleanaway’s advantage. Firstly, community expectations around the dumping of waste into landfill have evolved. People now want recycling and a circular economy where resources are re-purposed and re-used. Governments have responded by increasing landfill levies. It now costs more to dump waste, but it puts value into the disposal process if one can figure out better things to do with that waste. A waste disposal company with only a small fleet or trucks that only picks up waste for landfill is not well placed in this new environment. But a company with scale can gain a competitive advantage if it thinks about what it can do with that waste and participate in the circular product cycle —this is what Cleanaway is doing.
The second factor that has made waste disposal a more attractive investment is industry consolidation. Two of Cleanaway’s larger competitors, Veolia and Suez, merged earlier this year to become one player in Australia. To get the merger past the competition watchdog, the Australian Competition and Consumer Commission, the combined group had to dispose of some landfill assets in NSW. Cleanaway was able to buy those assets, which fitted very well into its network. As a result, Cleanaway was able to improve its business and asset base, at the same time there is one less competitor in the market.
Cleanaway’s overall competitive position in an in-demand sector of the economy has improved. In an inflationary environment and a tight labour market, Cleanaway appears to be in a good position to pass on increased costs to its customers.
This suggests a compelling future for the business. Cleanaway is a good example of how we include companies in our portfolio that we think have an ability to deliver good returns over the long term, can adapt to changing environments and strengthen their longevity despite different economic cycles.