With the recession putting paid to spending plans across a number of sectors, investors are having to turn to areas where regulation and government spending are likely to at least maintain budgets. One such area is waste where EU waste directives and recycling targets, along with annual inflation-busting hikes in landfill tax rates continue to provide opportunities.
Local authorities are under increasing pressure to landfill less and recycle more. Landfill taxes are rising by £8 a tonne every year through to 2001, by which time they will have doubled in four years. At the same time local authorities who overshoot their landfill allocations are being hit with fines of £150 a tonne for each tonne over their allowance.
With spending on waste treatment, recycling and waste collection having already begun to ramp up in recent years research suggests another £9bn will have to be invested in recycling and waste treatment facilities if the UK is to hit its recycling targets. Under the EU Waste Directive, by 2020 the UK should have reduced the amount of waste that goes to landfill to 35 per cent of its 1995 level.
Companies such as Shanks, Pennon and, more recently, Aim-traded May Gurney, have rapidly built their recycling and waste businesses on the back of a trend that has been growing. With local authorities increasingly keen to outsource their waste services in a bid to keep up with central government targets on waste and recycling, companies such as Shanks and Pennon's Viridor division have won long term contracts which provide visibility and add a defensive quality to their businesses.
On the Aim market TEG Group, Augean and May Gurney also provide possible exposure to the growth in spending on waste. TEG's composting vessel technology helped it win a share of the £4bn Manchester Waste Private Finance Initiative contract and is gaining increasing traction in both the public and private sector.
Augean has a combination of hazardous waste landfill sites and waste treatment businesses. It has been beset by unpredictable volumes in its landfill sites which have hampered its financial performance and hence its share price. But with the value of its landfill assets rising each year as nationwide capacity shrinks, and its growing treatment business, it has attracted possible bid interest. May Gurney has traditionally supplied maintenance services to local authorities and utility companies but the acquisition of ECT Recycling earlier this year has given it a foothold in the waste and recycling sector.
With the EU waste directive pushing governments, and in turn councils, to recycle more and landfill less the waste industry is set for a period of long term growth over the next decade. It may not be explosive growth, and there are concerns in the short term over the financing, or lack of, for contracts, but in a tough year like 2009 the likes of Pennon, Shanks and May Gurney offer good value for the long term. Also, as with Augean, if share prices remain depressed for long enough then speculative interest is likely to emerge in some of the sectors bigger players, following the lead of Biffa, which was taken private in 2008.
