Waste management group Shanks (SKS) is suffering due to plunging cash flow and weak core markets, which experts aren't expecting to recover until 2015. With capital spending programmes draining cash, goodwill writedowns cutting net asset value (NAV) and a dividend cut forecast now being forecast by one broker, we wouldn't hang around for the full-year results to get out. Sell.
- Investment in PFI
- Cost savings
- Weak core waste markets
- Falling cash flow
- Broker downgrades
- Dividend cut possible
Shanks' first-half results were dismal. Revenue was down 15 per cent to £339.6m, and underlying profit before tax slumped 29 per cent to £14.3m. Firstly, this demonstrates how operationally geared the waste management business is, with changes in revenue producing much larger changes in profits. Secondly, and more worryingly, it shows the painful impact of a downturn in European construction activity, which is a key cause of waste generation and accounted for a third of all EU waste by tonnage in 2010, according to Eurostat data.
The Benelux solid waste operations reported revenues down 18 per cent to €167.1m, and trading profit down from €13.9m, to €9.4m. Hazardous waste, based in the Netherlands, reported revenues down 15 per cent to €67.7m and trading profit down 12 per cent to €9.9m. These divisions, when combined with small contributions in these countries from organics, landfill, power and sand quarry operations, generated 73 per cent of 2012 group revenues and 82 per cent of group trading profits.
Shanks said unusually bad weather in the year to March had an additional material impact on the solid waste, hazardous waste and organics divisions. Nevertheless, Shanks expects full-year results broadly in line with its expectations. The broker downgrades over the past 12 months have been brutal, with Peel Hunt slashing forecasts for adjusted pre-tax profits since last year's results were reported from £41.1m to £26.3m today, meaning forecast EPS fell from 7.7p, to 4.9p. But Peel Hunt is expecting this to be a trough year for earnings with EPS recovering to 5.2p in 2014 and 6.1p in 2015.
At the 75th construction market forecast conference in Copenhagen, Denmark in December 2012 the rubble producers themselves took a different view. Experts from EUROCONSTRUCT Group revised down forecasts for 2012 from a 2 per cent decline to a 4.7 per cent decline and, contrary to original forecasts, now expects a further loss of around 1.5 per cent in 2013, with any recovery by 2015 only expected to be moderate. Construction in the 19 member countries in 2013 should fall just short of levels last seen in the mid-1990s.
SHANKS (SKS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 74p | MARKET VALUE: | £292m | |
| TOUCH: | 73.5-74p | 12M HIGH: | 98.5p | LOW: 73p |
| DIVIDEND YIELD: | 4.1% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 86p* | NET DEBT: | 55%** | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 684 | 19.6 | 4.80 | 3.00 |
| 2011 | 717 | 21.2 | 5.50 | 3.25 |
| 2012 | 750 | 31.4 | 6.70 | 3.45 |
| 2013*** | 648 | 26.0 | 4.85 | 3.00 |
| 2014*** | 649 | 27.1 | 5.05 | 3.10 |
| % change | +0 | +4 | +4 | +0 |
Norml market size: 5,000 Matched bargain trading Beta: 0.89 *Includes intangible assets of £259m, or 65p a share. **Excludes £50m of PFI debt ***Jefferies, underlying forecasts not comparable with prior years | ||||
This is causing a strain on Shanks' business model as it is still investing in growth. Underlying free cash flow slumped by 44 per cent to £10.2m in the first half, but Shanks was still spending £11.7m on net growth capital expenditure, £11m on acquisitions and disposals, £8.9m on PFI funding and £9.3m on dividends. This resulted in a net cash outflow of £33m in the first half. Given the weak second-half trading, plus a further £10m in cash costs for restructuring, on top of £2.3m in the first half, and we think something has to give. Broker Jefferies is forecasting a cut in the dividend from 3.45p to 3p.
Cutting the dividend, if it were to happen, would remove one prop for the share price, and another, the NAV of 86p, also looks shaky. That is because 65p of NAV, or £259m, represents an intangible asset and, as part of a £20m-a-year cost reduction programme, Shanks is expected to take a £32m restructuring and impairment charge, as well as a £19m goodwill writedown - about 8 per cent of the group's total goodwill. Worryingly, some of the impairment relates to assets that Shanks has only recently finished building in Scotland.
