Market failing to understand business with ‘endless opportunity'

Questions remain about the resilience of Australia’s economy in the face of teetering markets and potential recession. However, the nation could unlock an additional $23 billion in gross domestic product by 2025 by moving to a ‘circular economy’ creating tens of thousands of jobs in the process…and one Aussie company could end up being a leader in that pack.

The circular economy refers to the work involved in recycling, reducing waste and creating new sustainable jobs, and has reportedly become one of the most used phrases in business. Altor Capital fundie David McNamee echoed and enforced the idea further stating that big corporations are under pressure to improve the way they reuse and recycle their products.

“These businesses are being forced to find ways to utilise their products, the life of their products and the way that they recycle products as well,” Mr McNamee said, referring specifically to companies that deal with printer cartridges, soft plastics and similar packaging products.

While speaking on Reach Markets’ The Insider: Meet the Fund Manager in March 2023, Mr McNamee selected Close the Loop Ltd (ASX: CLG) as one of his favourite stocks citing that the group is maximising the use of technology to produce high value products out of those considered waste. Watch the full The Insider: Meet the Fund Manager session.

Close the Loop was born of the December 2021 merger of the world’s largest take-back provider of ink and toner cartridges, also called Close the Loop, and Victoria-based O F Packaging, the developer of TonerPlas® a ‘shovel-ready’ award-winning asphalt additive that makes longer-lasting, more reliable and environmentally-friendly roads and has been used by more than 60 councils in Australia.

“If you want exposure to the circular economy [Close the Loop] is one of the only players that can take a waste product and turn it into a highly valuable product at the other end,” Mr McNamee said, adding that Close the Loop is one of the industry’s few capable providers in that respect.

“The crux of the moat behind the business – which is what we think the market is failing to understand – is that [Close the Loop] got over 260,000 collection points around the world that they have built up with customers and blue-chip brands over the last 20 years. That infrastructure that they have on the collection side, it cannot be replicated in our view,” Mr McNamee said.

Close the Loop operates across 20 countries and services more than 250 enterprise customers including supermarket chains Coles, Woolworths, Aldi and Walmart, hardware giants HP, Canon, Xerox and EPSON, petcare companies Petbarn, Ivory Coat, Hypro and Wag and host of other businesses from varying market sectors.

In May 2023, the business completed its acquisition of ISP TEK Services and Captive Trade Corporation (CTC) – a US-based electronics refurbisher and trading platform business – which is expected to provide Close the Loop with a considerable US market presence and extensive distribution networks. Earlier in the year, the company acquired US business In-Plas Recycling.

Factoring in the business’ recent acquisition of ISP TEK and CTC and a supporting capital raise of $45 million, Mr McNamee placed the business’ trading position less than 5x pro-forma Enterprise Value to EBITDA.

As at 10 March 2023, Close the Loop exceeded its revenue and EBITDA forecasts to reach $89.2 million (up 20.7%) and $14.3 million (up 16.3%) respectively, with a cash hold of $10.6 million. The company forecasts a statutory EBITDA of $22 million in FY23, including a two-month contribution from ISP TEK and CTC, and expects no less than $200 million in revenue and $43 million EBITDA in FY24.

“We think the moat around the business, the tailwinds are absolutely enormous…the gross profit margins, cash flow margins that they’re getting out are underneath the EBITDA line is impressive,” he said.

“There’s going to be more and more tailwinds that are forced upon corporations. We think just with the recent acquisitions they made and the organic business that they’ve got in terms of the packaging, recycling and the refurbishing there is just endless opportunity,” Mr McNamee said.

Click here to view more videos from David McNamee’s The Insider: Meet the Fund Manager session.

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