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As a nation, we are producing more waste than ever before. It seems that our growing effluence may be inextricably linked to our relative affluence. But as ghastly as this may seem, our embrace of a throwaway consumerist culture has at least underpinned the growth of the waste management sector - waste collection, treatment and disposal.
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Under skiploads of legislation from Brussels, particularly the 14-page Landfill Directive, the size of the UK waste management sector is set to increase from £4.3bn in 2003 to £9.8bn in 2012, according to figures published by AMA Research.
The UK's traditional low-tech waste management solution - landfill - is running out fast and the proportion of our trash that we are obliged to recycle is on the rise. Measures are also under way to drastically reduce the release of methane (a greenhouse gas) by limiting the disposal of biodegradable waste in landfill sites. Enforced changes to the methods under which hazardous waste materials are disposed are also contributing to the increasingly high-tech nature of the industry.
These factors are not only contributing to the expansion of this market but are also changing the nature of the companies involved, which makes waste management a sector that needs to be looked at on a company-by-company basis.
Shanks for the memory
With a market-cap in the region of £412m, Shanks Group is the largest specialist UK waste management company trading on the London Stock Exchange (LSE). Consolidation has been a feature of the sector in recent years, and the group recently received an offer from private equity Carlyle Group . But the bid and the shares hit the buffers after Shanks issued a profit warning, which prompted its suitor to drop the effective offer price by 15p to 120p.
The board thought 120p was far too low and there are others who agree. Currently trading at 102p, shares in Shanks have recently been upgraded to a 'buy' by Goldman Sachs with an accompanying price target of 159p. Goldman Sachs makes the point that Shanks has significant exposure to the industrial cycle and only 15 per cent of its contracts are linked to municipal waste. Therefore, the expected recovery in its core markets - the UK and Benelux - should boost earnings over coming months.
Special cases
Problems associated with falling industrial waste volumes during the recession have also had a negative impact on revenues at Augean. The company operates in a specialist market treating and disposing of hazardous waste materials. Revenues were down 21 per cent last year, but the company did manage to organise a £10m revolving credit facility after a successful placing in October.
Trading conditions are likely to remain tough until the third quarter of this year. The company's position hasn't been helped by the decision of Northamptonshire County Council to reject a proposal by Augean to bury 750,000 tonnes of low-level radioactive waste in its Kings Cliffe landfill site over the next three years. Does that count as nimbism?
It's one thing burying nuclear waste in a great big pit, but it's quite another thing when you're charged with the task of removing asbestos from the UK's postwar building stock. Silverdell is a UK waste management specialist with over 30 years of experience in this highly-technical area. The company services both the private and public sectors, and has also been the beneficiary of more stringent environmental legislation in recent years.
With Asbestos being the greatest source of occupational fatalities in the UK, there is no shortage of long-term opportunity for Silverdell. Unfortunately, though, Silverdell's share price collapsed in line with activity in the UK construction sector. The company is actively diversifying into areas not linked to the mainstream construction cycle in a bid to secure alternate revenue streams.
Consolidation and expansion into overseas markets
Overseas companies, such as France's Veolia Environment (Euronext:VIE, NYSE:VE), and Waste Management Inc. (NYSE:WM) of the US, have expanded by aggressively seeking market share abroad. Meanwhile, other UK-based players have been subsumed into larger listed groups or taken private.
Viridor, one of the UK's major landfill operators, has grown as part of FTSE 250's Pennon Group (formerly South West Water). Support services companies, such as Enterprise, have also developed specialist waste divisions primarily through acquisition, while other companies such as Biffa and Cory Environmental have been acquired by private equity. Waste Recycling Group is another major UK player with significant interests abroad. It was once controlled by Terra Firma Capital Partners, the investment company run by the estranged UK financier Guy Hands, until it was sold to the Spanish construction group Fomento de Construcciones y Contratas SA in 2006.
Multi-national utilities, particularly water companies, have snapped up waste management companies as they offer neat operational synergies. Industry-wide consolidation has certainly reduced opportunities to gain direct exposure to the waste management sector, although a number of specialist funds, such as Impax Environmental Markets, now provide an effective means of entry for retail investors.
OUR VIEW:
Despite consolidation over the past decade, the waste management industry is still fragmented to a large degree. This means there is plenty of scope for further M&A activity for some time to come. Meanwhile, legislation will continue to drive growth, as will increased outsouring by local government and industry. Overall, we're positive on the sector.
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| Following on from the aborted Carlyle tie-up, shares in Shanks Group are trading significantly below historical multiples. Activity in Shanks's key industrial markets is likely to accelerate over coming months, although the pace of recovery is open to question. Only about 8 per cent of revenues are denominated in sterling, so the unfolding Greek debt crisis has implications for earnings. However, Shanks appears to be fundamentally undervalued, so apart from potential share price upside, the possibility of other suitors can't be ruled out. |
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Silverdell's specialist market niche is both its strength and its weakness. From the latter perspective it means that the valuation fell in tandem with the construction sector; a situation from which the company's share price has yet to recover. However, Silverdell hasn't been sitting still: operating margins are up, and it is well on the way to eliminating gearing altogether. New business streams are healthy, as is client retention, so it's unsurprising that broker Collins Stewart believes Silverdell is set to move from recovery into growth mode. |
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