Top trader has swing at Bingo Industries

“It seems clear to me that these are unsustainable margins.”

Dey seeks to put Bingo’s margin into perspective by noting that the best waste management companies in the world have an EBITDA margin of around 30%.

“Therefore, BIN should be one of the best companies in the world in this space to maintain a margin above this level. It’s a very competitive business. The industry and the latest ACCC investigation may make future price increases more difficult.”

They believe this is not part of actual operating EBITDA and therefore should have been removed. “Had it not been for this asset sale, Bingo would have missed our EBITDA estimates.”

He notes, however, that the CEO said on the call that he would continue to sell assets in the future and “that’s probably why he justified keeping it in underlying EBITDA.”

“But if that were the case, I would also have retained the integration costs in the underlying EBITDA, given that acquisitions appear to be a regular business activity for the company. In fiscal year 2019, integration costs were $11.4 million, bringing the two-year total to $18 million.”

Dey says the overall quality of EBITDA is also hampered by the low cash conversion of 71%.

Bingo says the cash conversion is 90% “but when you look at how they calculate that, they added $9.7 million in acquisition and integration costs to operating cash flow, before compare it to EBITDA”.

“But where did the $9.7 million come from when I showed earlier that $6.6 million was the add-on for integration costs when calculating underlying EBITDA? If I add the $6.6 million cash conversion is still only 79%.

In his conclusion, Dey says:

BIN is difficult. You have a high FY20 PE of 32x, an unsustainable EBITDA margin in my view, a decent revenue shortfall, and questions about the company’s organic revenue growth rate. The advice implies a 2H slowdown and that’s either conservative and therefore there will be an upgrade, or it could mean things aren’t going as well as we thought. But given the accounting quality issues, I just can’t buy the stock here.

Credit Suisse analysts have an “outperform” recommendation on Bingo shares.