Shale oil recovery tanks at Newalta’s satellite facility in Gonzales, Tex.Ric Kokotovich
For two decades, Newalta Corp. has made money recovering and recycling industrial waste from other companies. Now, investors are counting on the Calgary-based company's own corporate cleanup to increase its earnings.
The environmental waste management company has plans to boost both productivity and profit through cost cuts and, more recently, by putting its lower-margin industrial waste division on the block.
At the same time, Newalta is expanding its services into the higher-profit business of handling waste from the oil and gas industry across North America.
Analysts say the moves, if successful, could add extra spit and polish to a stock that has outshined the overall market already over the past year.
"What we really like about this company is that it is a growth stock with good visibility," said National Bank Financial analyst Rupert Merer. "It makes sense for them to sell the industrial assets and recycle the capital into high-growth areas."
Mr. Merer is one of five analysts with a "buy" or equivalent recommendation on Newalta, while four say "hold," according to S&P Capital IQ.
Newalta has been working on streamlining some of its operations to save about $10-million annually. At the urging of some of its investors, the company also announced a strategic review of its industrial waste division, including a possible spinoff or sale. The division handles waste for sectors such as mining, construction and automotive, and includes a lead-acid battery recycling facility in Sainte-Catherine, Que., a landfill in Stoney Creek, Ont., and a used oil re-refining facility in North Vancouver, B.C.
Analysts say the company would be better off focusing on the oil and gas sector, which has more growth and higher margins.
According to the company, gross margins in its industrial segment were 12 per cent in 2013 compared with 38 per cent in its oil field division and 33 per cent in what it calls "new markets," which include a heavy oil unit in Western Canada and a U.S. unit involved in shale oil-related activities. "The industrial division has historically been a poison pill for other potential suitors to invest or purchase Newalta," CIBC analyst David Noseworthy said.
Still, Mr. Noseworthy has a "hold" rating on the stock and a $22 price target, waiting to see what happens with the industrial division and because the shares have already run up 60 per cent over the past year. "We believe Newalta has a superior strategy in place. Now is the time for execution," he said.
Newalta shares are currently trading around $21, its highest level since early 2008. The shares hit a 52-week high of $21.43 on April 8, the day after it announced the hiring of RBC Dominion Securities to conduct the strategic review of its industrial division. The analyst consensus price target for Newalta over the next year is $22.54, according to S&P Capital IQ.
Mackie Research Capital analyst Raveel Afzaal said he would maintain his "hold" on the stock and $21 target price until there's news on the industrial division. In the meantime, he believes in the company's growth strategy. "The company has a dominant position in a high-growth sector," he said. "We believe that oil and gas waste streams will continue to grow as North America moves toward energy independence."
Investors also like the company's growing dividend, which currently yields about 2.1 per cent.
"[Newalta] is a good way to play the environmental and crude production growth story," said John Stephenson, senior vice-president and portfolio manager at First Asset Investment Management, which has owned the stock for a couple of years. Mr. Stephenson likes the prospects for the sale of the industrial division, money from which he said could be reinvested into higher-growth oil field activities.