Augean – time to clean up?

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Augean – time to clean up?
Master Investor Magazine

Master Investor Magazine Issue 59

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If Augean’s imminent results are better than brokers’ estimates, then investors in the shares could clean up, writes Mark Watson-Mitchell. 

Yesterday’s advance in the share price of Augean (LON:AUG), one of the UK’s leading waste management businesses, reminded me that the group will shortly be announcing its final results for the year to end-December 2019.

The group’s broker, N1+Singer, states that the company occupies a strong position in its markets with strategically located hazardous waste treatment and disposal facilities.

2019 saw it perform very strongly as it retained and secured new business, while also continuing to address costs and operational inefficiencies.

Augean has over 40% of the UK’s hazardous landfill capacity and the trends in ‘Energy from Waste’, nuclear and North Sea decommissioning are particularly supportive of sustained progress.

EBIT margins over 20% are impressive and drive strong cash flows that will quickly reduce debt, following the (disputed) HMRC payment, and allow for a resumption in dividends.

The broker states that “there are opportunities to leverage operations through select acquisitions.”

I profiled the group on 31 October at 158.5p and set an end-2020 target price of 200p.

The market was then going for £105m in revenue for 2019 and £18m pre-tax profits, worth 14p in earnings and no dividend expectation.

Then up to £118m for the current year to 31 December 2020, giving £23m pre-tax, worth 18p per share in earnings.

On 13 January the company issued a very terse trading update, so brief that it may well have been missed by hordes of market observers.

The company announced that “trading has continued to be strong through the final quarter and it expects, subject to audit, to report adjusted PBT for the year ended 31 December 2019 at least in line with recently upgraded consensus market expectations of £18.4m.”

Last year the group announced its finals on 26 February, but declared its trading update on 9 January, which was four days earlier than this year. So, it is reasonable to expect the 2019 results to come out sometime over the next fortnight or so.

Perhaps the move upwards in the shares in the last few days is an early pointer, having risen from 192p on 31 January, to 208p on 13 February and then up to 225p yesterday, before closing at 220p. The shares actually peaked at 232p early in January, before coming off with the market.

The shares last traded this high back in 2005 – and my goodness a lot of waste has built up over the intervening years.

The Augean Stables were described in the Greek myth of the ‘Labours of Hercules’. The stables, which belonged to King Augeas, housed a large herd of some 3,000 oxen cattle and had not been cleaned for years.

Hercules was ordered to clean them out. He did so by diverting the course of two rivers, one of them being the River Alpheus, so that they flowed through the stables. Hercules, it is claimed, cleaned up the stables in just one day.

If the imminent results are better than brokers’ estimates, then investors in the shares could also be cleaning up – I set a new end-2020 target price of 250p.

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