Report highlights implications of COVID-19 on waste and environmental services businesses

Houlihan Lokey, Los Angeles, in conjunction with L.E.K. Consulting, Boston, released their joint Environmental Services Outlook for Summer 2020 July 6. The report examines five sectors within the environmental services market, including waste and recycling, special waste services, environmental consulting and remediation, response and restoration and industrial in-plant services.

Prior to February, the report outlines how waste management companies specifically showed consistent growth over the last 10 years while, more generally, environmental services businesses serving various end markets have fared better than those with more concentrated exposure.

Since February, the report shows that waste-specific companies have recovered since COVID-related volatility in late Q1 and early Q2, while some public environmental services companies have recovered and others have suffered the impacts of oil price volatility. Additionally, the report shows that trading multiples have recovered above three-year averages for waste and environmental service companies and that revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) margins have been largely stable.

Specific to the private sector, the report states, “Private company valuation depends on strategic fit and growth opportunity and could trade higher than public comparables. Diversity in service offering and end market, combined with geographic coverage, also drive value for private companies.”

The report notes that in light of these factors, the M&A outlook appears positive for the industry despite some delays in closings and financing from COVID.

The report also notes that the essential nature of waste and environmental services businesses helps protect many of these companies from significant ramifications arising from the virus. Those that can diversify end markets served and services provided, ensure flexible operations and capital structures, display strong marketing positioning, tout a robust safety record and embrace technology and automation are those that are especially protected against market forces.

Within the outlook, various anonymous executives are quoted regarding the effect COVID-19 has had on their operations. The perspectives offered vary by specific industry and market, but overall sentiment shows that project-related work has remained consistent, commercial and industrial volumes are down while maintenance-related services have been mostly unchanged. Also, many companies say work for in-the-field staff has gone on with minor changes for safety, while office staff commonly work from home. Sales staff, while working largely from home, have experienced the most disruption, but client acquisition activity is expected to bounce back in the near term.

The report states that companies have noted that they are reducing their capital expenditures to protect themselves, but are still largely looking at tuck-in M&A opportunities as potential avenues for growth. Most operators believe these opportunities could largely still be months away.

Looking to the future, continued social distancing, travel reductions, construction slowdowns and commercial and industrial activity slowdowns are anticipated to have varying negative impacts for environmental services participants, while a heightened focus on health and hygiene throughout the country indicate these services will remain in high demand.  

Specific to waste and recycling, the report paints a positive near-term outlook for residential collection as increased time at home acts as a demand tailwind. Conversely, slowed retail, lodging, restaurant, education and office activity has resulted in a less favorable near-term outlook for commercial collection. Somewhere in the middle is industrial waste and recycling service, where thanks to the essential nature of many businesses, haulers have seen predictable activity from customers.

The full report is available online.