Could this ASX 200 share cash in on the suspension of REDcycle?

A man holding a packaging box with a recycle symbol on it gives the thumbs up.A man holding a packaging box with a recycle symbol on it gives the thumbs up.

The Cleanaway Waste Management Ltd (ASX: CWY) share price is under consideration by investors on news the business could expand into the recycling space. It comes after recycling coordinator REDcycle suspended its collection of soft plastics.

It has reportedly ceased activity because third parties can’t deal with the huge volume of used soft plastics being returned.

For readers that don’t know, Cleanaway is one of Australia’s largest businesses operating waste and recycling collection trucks, as well as waste centres. It recently held its annual general meeting (AGM).

Potential REDcycle competitor

The Australian Financial Review (AFR) has reported that Cleanaway and plastics maker Qenos are weighing up a “$500 million co-investment” to step into the space left by REDcycle. The REDcycle program allowed shoppers to return soft (scrunchable) plastics via Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) supermarkets.

Apparently, the two businesses have been “working for months” on a plan to collect around 100,000 tonnes annually of soft plastics through existing household garbage collections. Of course, Cleanaway trucks already do this for hundreds of locations.

Cleanaway boss Mark Schubert explained a final decision will be made by mid-2023 on whether it should proceed, the AFR reports. Though it will depend on the “price and availability” of gas for these potential new plants that may be built on existing Qenos sites in Sydney and Melbourne. This will be an important part of the business case for the ASX 200 share.

According to the plan, the Cleanaway project would aim to recycle about 10 times the quantity REDcycle was collecting.  

How would this work?

If this were to happen, it would be based on a “bag in a bin” concept at each household. Cleanaway would integrate the soft plastics pickup into the weekly truck collection schedule. Mr Schubert said:

It’s a very convenient solution at scale, you do a bag in a bin.

What the REDcycle program showed is there is huge community and customer support. What’s required though is scale.

Our plan would be to invest in the front-end sorting.

It would take about two years for the plants to be fully operational. Cleanaway would share about half of the $500 million cost.

Cleanaway has reportedly already done trials of soft plastic pick-ups for about 2,000 homes in inner Melbourne.

The AFR reports that the technology to do this already exists. In fact, it’s happening overseas on a commercial scale. In terms of the process, the newspaper said:

The companies would jointly invest in the advanced recycling technology to convert the soft plastics into feedstock, and make new plastic through a process known as pyrolysis. The end product is a polyethylene called Alkanew, which can be used to re-manufacture the very same packaging.

Is the Cleanaway share price an opportunity?

In 2022 to date, Cleanaway shares have fallen by more than 12%.

Macquarie currently has an outperform rating on the ASX 200 share, with a price target of $2.90. This implies a mid-single-digit rise for the Cleanaway share price. Though, potential cost pressures are giving the broker cause for caution.

The post Could this ASX 200 share cash in on the suspension of REDcycle? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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