On Tuesday, Raymond (NS:RYMD) James reaffirmed its positive stance on GFL Environmental (NYSE:NYSE:GFL) shares, maintaining an Outperform rating and a $50.00 price target. The company, currently valued at $17.1 billion, has seen its shares rise over 31% in the past year, trading near $43.53. According to InvestingPro data, analysts maintain a bullish consensus with price targets ranging from $27.53 to $70.00. The company recently announced the sale of its Environmental Services (ES) segment to a buyer group including Apollo and BC Partners for C$8.0 billion. This valuation is approximately 17 times the segment's trailing twelve-month adjusted EBITDA, according to Raymond James' calculations. With the company's total EBITDA at $1.35 billion, this transaction represents a significant portion of GFL's operations. InvestingPro analysis reveals 8 additional key insights about GFL's business fundamentals and growth prospects.
The transaction, which includes C$6.2 billion in cash net of taxes and a C$1.7 billion retained equity interest, also provides GFL with the option to repurchase the ES business within five years. The deal structure is designed to minimize tax implications and allow GFL shareholders to potentially benefit from the high-quality assets' anticipated value growth.
GFL intends to allocate C$3.75 billion from the proceeds to reduce debt and C$2.25 billion for share repurchases, aligning with initial management plans. The debt reduction is expected to save approximately C$200 million in annual cash interest, enhancing free cash flow (FCF) conversion and margins. This move is particularly significant given GFL's current debt-to-equity ratio of 1.48 and total debt of $7.4 billion, as reported by InvestingPro. However, the deal may slightly dilute FCF on a pro forma basis.
The transaction is expected to close in the first quarter of 2025, but Raymond James will retain the ES estimates in their financial models until further details are provided in the fourth-quarter 2024 earnings call and the upcoming Analyst Day on February 27. The sale is seen as a move that cleans up and simplifies GFL's business narrative, offers price discovery, and reinforces management credibility. Post-deal, GFL is projected to have a balance sheet leverage around 3 times, which is comparable to industry peers, and will focus nearly entirely on the more predictable solid waste sector.
The analyst from Raymond James highlighted that the implied multiple paid for the ES segment is higher than GFL's current valuation, suggesting that GFL's core solid waste assets could be undervalued. The analyst concluded that the deal enhances GFL's investment story by potentially reducing valuation multiples and strengthening the balance sheet. Based on InvestingPro's Fair Value analysis, GFL appears to be trading slightly above its Fair Value, though analysts expect the company to become profitable this year with a forecasted EPS of $0.56.
In other recent news, GFL Environmental has been the focus of notable developments. The company reported a robust third quarter for 2024, with nearly 20% growth in adjusted EBITDA and a record-breaking adjusted EBITDA margin of 31.1%. This performance was mainly attributed to disciplined pricing strategies, operational efficiency, and the influence of recent acquisitions.
CIBC (TSX:CM) analysts have maintained an optimistic stance on GFL Environmental, raising the price target on the company's shares and projecting a substantial increase in the company's comparable adjusted EBITDA margin over the next three years. These projections are expected to place GFL's margins into the low-30% range, a growth rate above the average margin expansion within the waste industry.
GFL Environmental also revealed plans for significant investments in mergers and acquisitions, emphasizing expansion of its recycling and renewable natural gas infrastructure. The company invested $96 million this quarter, with intentions to allocate approximately $900 million towards M&A and growth investments. Moreover, the company is considering the sale of its Environmental Services segment, expecting a minimum of $6 billion in after-tax proceeds.
In terms of future plans, GFL aims to provide a comprehensive 2025 outlook in February, following the potential sale of its Environmental Services segment. The company projects mid-single-digit organic growth, double-digit adjusted EBITDA growth, and over 100 basis points of margin expansion for 2025.
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