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Clean up with Augean

The specialist waste management company looks well positioned to capitalise on growth in the energy from waste sector
November 7, 2019

Handling waste is an unglamorous task at the best of times and Augean (AUG) operates at the grittier end of the spectrum, specialising in hazardous waste solutions. Focusing on these niche activities seems to be paying off – adjusted pre-tax profit doubled to £9.6m in the first half of 2019. In its third upgrade of the year, the group now anticipates the full year total will be “materially ahead” of consensus expectations of £16.5m (which would already have been a 45 per cent increase on 2018).

IC TIP: Buy at 158p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

Successful turnaround

Energy from waste opportunity

Strong cash generation

Bear points

Landfill tax dispute

Cyclical exposure

No dividend

That’s a far cry from the position two years ago – what analysts at Edison Investment Research characterise as “a sprawling waste management company... that frequently failed to meet market expectations”. Augean has since focused on improving cash control and reducing costs, raising almost £10m from selling underperforming businesses. It has slimmed down from five operating divisions to just two – ‘treatment and disposal’ and ‘North Sea services’.

In ‘treatment and disposal’, the largest waste stream comes from disposing of ash produced by energy from waste (EfW) facilities. Waste and bioenergy consultancy Tolvik forecasts the volume of waste processed by UK EfW plants will rise by two-thirds to 19.2m tonnes by 2024, with each tonne of incinerated waste generating 3.5 per cent residue. As one of only three operators in the market and boasting a 90 per cent contract win rate, Augean looks well positioned to exploit this long-term growth opportunity. Revenue from incinerator ash jumped by 28 per cent to £7.7m in the first half of the year. 

Limited disposal options mean hazardous landfill demand is expected to persist. This bodes well for Augean given it holds 40 per cent of the UK’s hazardous landfill void when the government has ceased awarding permits for new sites. Large volumes of contaminated waste are derived from the construction sector, creating vulnerability to downturns. But with the recent trading update noting higher landfill volumes across all waste types, this suggests Augean is defying the current construction slowdown.

Managing waste produced by the oil and gas sector, revenue from ‘North Sea services’ increased by 42 per cent to £13.7m in the first half of 2019. However, lower margins mean this translated to an adjusted operating profit of just £0.9m. Focusing on the sizeable decommissioning sector, the group secured a major contract to clean up Shell’s Curlew vessel in June. Of an estimated £15bn-£20bn that will be spent on decontaminating and dismantling the industry’s ageing assets over the next decade, Augean believes it can address around 5 per cent.

An ongoing tax dispute is casting a shadow with HMRC alleging the group owes around £40m in underpaid landfill taxes plus a £4.6m penalty. Edison believes the final total (including all assessments and penalties) could reach £53m. Maintaining it has paid the correct amount, Augean has not created a provision for these charges based on legal advice, although the suspended dividend suggests management remains cautious. Potential payment has been deferred until after a tax tribunal, expected to be held in 2020.

A strengthened balance sheet and healthy cash generation leaves the group better placed to weather an unfavourable outcome. Net cash is forecast to reach £30m by the year end. £12m in first-half free cash flow was just £0.6m shy of the total for the whole of 2018.

AUGEAN (AUG)    
ORD PRICE:158pMARKET VALUE:£164m 
TOUCH:157-159p12-MONTH HIGH:168pLOW:41.1p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:9 
NET ASSET VALUE:65.1p*NET CASH:£22.8m 
Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201676.07.04.41.0
201767.07.06.5nil
201879.711.09.1nil
2019**10518.414.9nil
2020**12022.818.2nil
% change+14+24+22-
Normal market size:5,000    
Beta:-0.98    
*Includes intangible assets of £20m, or 19p a share
**Edison forecasts, adjusted PTP and EPS figures