| Master Investor Magazine
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This waste disposal company doesn’t mind getting its hands dirty when seeking out a return for shareholders, writes Mark Watson-Mitchell.
In a market that is now getting profit warnings more than daily, it is totally refreshing, if not invigorating, to see a company coming out with a trading update expecting its profits to be ‘materially ahead’ of current market expectations.
And if I did not take a closer look it would have been a stupid waste of my time doing something else.
That is just what Augean (LON:AUG) is all about – waste. In fact, it is one of the UK’s leading waste management businesses, and it appears to have been benefiting in the last year from a 20% increase in landfill volumes and at the same time enjoying an improvement in the pricing of its landfill sites.
After a recent spate of disposal of underperforming assets, making operational improvements and overall reorganising, it seems that it has actually been doing very well on all fronts of its business activities.
It is split into two main service divisions: Treatment and Disposal, and North Sea.
It has an extremely wide range of services that it offers clients large and small. It particularly likes coping with the UK’s more difficult to handle wastes.
Decommissioning, drilling and well abandonment, HiPODS, industrial services, landfill and soil treatment, radioactive waste services, transport, and waste treatment and recycling – no matter what waste there is, its experts provide appropriate solutions.
Acids and other chemicals, aerosols, asbestos, ash residues from effluent waste and biomass plants, contaminated empty packaging, contaminated wood and paper, contaminated soil, dredgings, drilling waste, glues and adhesives, low level radioactive waste, naturally occurring radioactive materials, oil rags and wipes, oily sludges, paints and varnishes, solvents fuels and oils, waste electronic and electrical equipment – its list is almost endless in its ability to cope with the UK’s waste.
The group’s clients list ranges across a massive scope of business sectors – such as construction, energy, infrastructure, land remediation and development, nuclear decommissioning and radioactive, offshore, oil and gas, storage and logistics, and also transportation.
The group’s various operations take responsibility of the waste from the time it was collected right up to its final disposal. It has a network of permitted sites across the UK from Great Yarmouth in the South right up to Lerwick in the North.
My wife has enough trouble getting me to dispose of the waste products of our daily life and sorting it out into the proper recycling bins for weekly collection.
So, my mind spaces out when I try to take in exactly the services of Augean. Quite honestly, they deserve all the money they earn from waste – I would not want to be in their business. However, I would not mind coping with the cash that it generates.
Over the years from 2016 to 2018 the group’s revenue has risen from £76m to £80m, while its pre-tax profits have grown exponentially from just £1.27m to £10.59m last year. At the end of June, the company had a net cash balance of around £23m, while it generates cash at the rate of some £1.75m a month.
Prior to the mid-October trading update, the market was going for £105m in current year revenue and £18m pre-tax profits, worth 14p in earnings, then up to £118m for the next year to 31 December 2020, giving £23m pre-tax, worth 18p per share in earnings.
| Master Investor Magazine
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Those figures alone make this company extremely attractive on the growth front.
There is a small downside – a £40m hassle with HMRC, against which the group reckons that it has a strong legal case – but even allowing for that this really is a cracker, especially reinforced by higher profit estimates likely to be given in due course.
The group has 104,085,198 shares in issue. Four members of its Board own a total of 5,611,419 shares, representing 5.39% of the equity.
Large professional holders include Harwood Capital (26.04%), Canaccord Genuity Wealth Management (10.10%), Gresham House Asset Management (6.97%), Schroder Investment Management (6.73%), Close Brothers Asset Management (6.64%), Killik Asset Management (3.15%), Unicorn Asset Management (3.05%), FIL Investment International (2.94%), Hargreaves Lansdown Asset Management (2.74%), and Interactive Investor (2.35%).
I feel that this group’s shares, at the current 158.5p, offer excellent growth value. I see the shares gradually aiming to go back to above its 2005 price peak of 250p. However, I am happy enough to set a target price of 200p over the next eighteen months.