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Research: Industrials
Augean
Written by
Augean |
Resilience against a challenging background |
Trading update |
Industrial support services |
1 February 2016 |
Share price performance
Business description
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The strategy of making Augean a more resilient and sustainable business is clearly working with the update (25 January) suggesting trading remains in line with expectations. Given the exposure to the oil and gas market, this is a robust performance and reflects a management team on the front foot. With the share price drifting to the bottom of our valuation range (49-77p), nervousness over recent oil price weakness seems overdone.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/13 |
47.1 |
5.55 |
4.48 |
0.35 |
10.3 |
0.8 |
12/14 |
55.2 |
5.38 |
4.10 |
0.50 |
11.3 |
1.1 |
12/15e |
56.7 |
5.96 |
4.47 |
0.55 |
10.3 |
1.2 |
12/16e |
57.7 |
6.59 |
5.09 |
0.60 |
9.1 |
1.3 |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.
Trading remains in line with market expectations
Given the challenging economic background the strategy of operating five business units in diverse markets was clearly beneficial. Having tweaked our divisional assumptions at the interim stage, this update sees a continuation of the trends seen then and we are not proposing to adjust our group forecasts. Strong cash generation and the timing of some capex left net debt at £4.3m at end of 2015 and below market expectations.
Highlighting a few challenges for 2016
With the oil price continuing to hit new lows and make the headlines, lower drilling activity clearly has an impact on Augean North Sea Services (ANSS). However, by flexing its variable cost base and diversifying into production services, the division has mitigated some of the impact and our forecasts are already assuming a lower contribution in 2016. The other news is that in December 2015 HMRC updated the Landfill Tax guidance, creating disturbance in the soils market served by the Energy and Construction business. While this causes some temporary uncertainty, after a very strong 2015 for construction volumes, management were already looking to switch the bias of this division back towards higher-margin Air Pollution Control Residues (APRC) and is tendering for a number of major contracts.
Valuation: Uncertainty creating an opportunity
The current equity market weakness and concerns over its exposure to the oil and gas sector has caused the Augean share price to drift down to the bottom of our valuation range (49-77p). At the current price, a prospective FY15e P/E of 10.3x and EV/EBITDA of 4.6x fail to reflect the solid process the group has made both operationally and strategically. Another robust performance gives further credibility to the management team, which is responding well to the challenges and continues to focus on improving ROCE. With a strong balance sheet, Augean has the option of adding selective bolt-on acquisitions that enhance returns and shareholder value. Newsflow for such acquisitions could provide support for the shares.
Robust trading – in line with market expectations
The portfolio approach continues to help resilience
At the interims the management team explained the benefit of the portfolio approach of five businesses and the statement was another clear demonstration of the strategic benefits and inherent strength this gives the group.
Based on the trading update, an overview of business unit performance in 2015 and their 2016 prospects is outlined below. Final results will be announced on 22 March:
Energy & Construction (43% of group revenues, 79% of group EBITA)
A strong performance, helped by a significant increase in the volume of construction waste as the sector continues its recovery throughout 2015, although a note of caution was added with the recent update by HMRC of Landfill Tax guidance relating to certain types of contaminated soils. The division is targeting a number of APCR (air pollution control residues) contracts in 2016, which are higher margin and provide a better balance to the business.
Radioactive Waste Services (4% of group revenues, 20% of group EBITA)
As previously highlighted, despite a temporary delay to a number of tenders and contracts, higher prices compensated for lower processed volumes and allowed a modest improvement in 2015 profitability.
Industry & Infrastructure (19% of group revenues, loss making)
A mixed update with solid performances at Port Clarence and Paisley being more than offset by continuing operational issues at Avonmouth, leaving the division loss making. The slowdown in drilling activity has caused a reduction in the volume of drill cuttings transferred from ANSS to Port Clarence and led to the decision to make a £2.9m ‘non cash’ impairment of the asset. Given these issues, this division is clearly the focus of short-term actions to turn performance around.
Augean Integrated Services (8% of group revenues, loss making)
After further investment at the East Kent incinerator, plant availability is improving and it appears the previous operational issues are behind. Combined with a strong order book momentum at Total Waste Management (TWM), the division has recently moved to profitability on a monthly basis and management are confident on the outlook and we are forecasting a positive contribution in 2016.
Augean North Sea Services (26% of group revenues, 27% of group EBITA)
Reflecting a very strong H1 when the level of drilling activity remained high, despite the recent expected slowdown, ANSS still produced a growth in revenues and profitability compared to 2014. With lower drilling activity expected to continue throughout 2016, ANSS has increasingly looked to diversify the business away from exploration and towards production waste and onshore industrial services. Management was pleased to announce a further three-year contract in the Southern North Sea and further evidence of ANSS’s strong relationship with major operators and the diversification strategy has clear traction. However, this process will not fully compensate for the slowdown in drilling activity and our forecasts are already assuming a lower contribution from ANSS in 2016.
Financials: Forecasts unchanged despite the challenges
Despite the pressures caused by the weakness in the oil price and a number of other operational challenges, it is reassuring that Augean has continued to trade in line with market expectations – a strong endorsement of the group’s strategy.
In addition to the operational update, management took the opportunity to confirm cash generation remains strong and net debt levels will be lower than market expectation at £4.3m (our forecast was £6.2m). It is worth reiterating the financial strength of the group and the strategic options this gives going forward:
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Better than expected debt levels were a reflection of strong operational cash flow and timing of some of the capex on landfill capacity.
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With net debt at 0.4x EBITDA, management has significant firepower (£10-20m) and continues to look for selective value-enhancing acquisitions but prepared to be patient.
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The strength of the balance sheet will allow a progressive dividend policy.
Exhibit 1: Operating profit – divisional breakdown
Division (£m) |
H1 |
H2 |
2014 |
H1 |
H2e |
2015e |
2016e |
|||
Energy & Construction |
2.9 |
3.4 |
6.3 |
3 |
3.5 |
6.5 |
6.7 |
|||
Radioactive Waste Services |
0.7 |
0.3 |
1 |
0.8 |
0.3 |
1.1 |
1.2 |
|||
Augean Integrated Services |
(0.4) |
(0.3) |
(0.7) |
(0.4) |
(0.2) |
(0.6) |
0.1 |
|||
Industry & Infrastructure |
(0.5) |
(0.1) |
(0.6) |
(0.5) |
(0.4) |
(0.9) |
(0.5) |
|||
Augean North Sea Services |
0.3 |
0.7 |
1 |
1 |
0.4 |
1.4 |
0.9 |
|||
Central costs |
(0.2) |
(0.7) |
(0.9) |
(0.4) |
(0.5) |
(0.9) |
(1.2) |
|||
Operating profit |
2.9 |
3.2 |
6.1 |
3.5 |
3.1 |
6.6 |
7.2 |
|||
Interest |
(0.4) |
(0.4) |
(0.8) |
(0.4) |
(0.2) |
(0.6) |
(0.6) |
|||
Profit before tax |
2.4 |
3 |
5.4 |
3.1 |
2.9 |
6 |
6.6 |
|||
Source: Edison Investment Research
Exhibit 2: Financial summary
£'000 |
2013 |
2014 |
2015e |
2016e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
47,123 |
55,204 |
56,705 |
57,719 |
Cost of Sales |
(31,368) |
(38,852) |
(40,035) |
(40,300) |
||
Gross Profit |
15,755 |
16,352 |
16,670 |
17,418 |
||
EBITDA |
|
|
8,906 |
10,033 |
10,825 |
11,865 |
Operating Profit (before amort. and except.) |
6,235 |
6,146 |
6,561 |
7,221 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals |
(6,250) |
823 |
0 |
0 |
||
Operating Profit |
(15) |
6,969 |
6,561 |
7,221 |
||
Associated company |
(13) |
(5) |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Net Interest |
(674) |
(759) |
(599) |
(633) |
||
Profit Before Tax (norm) |
|
|
5,548 |
5,382 |
5,962 |
6,588 |
Profit Before Tax (IFRS) |
|
|
(702) |
6,205 |
5,962 |
6,588 |
Tax |
(977) |
(1,125) |
(1,312) |
(1,383) |
||
Profit After Tax (norm) |
4,571 |
4,257 |
4,650 |
5,205 |
||
Profit After Tax (IFRS) |
(1,679) |
5,080 |
4,650 |
5,205 |
||
Average Number of Shares Outstanding (m) |
99.7 |
100.1 |
101.7 |
102.2 |
||
EPS - normalised (p) |
|
|
4.48 |
4.10 |
4.47 |
5.09 |
EPS - normalised and fully diluted (p) |
|
4.48 |
4.10 |
4.47 |
5.09 |
|
EPS - (IFRS) (p) |
|
|
(1.79) |
4.92 |
4.47 |
5.09 |
Dividend per share (p) |
0.35 |
0.50 |
0.55 |
0.60 |
||
Gross Margin (%) |
33.4 |
29.6 |
29.4 |
30.2 |
||
EBITDA Margin (%) |
18.9 |
18.2 |
19.1 |
20.6 |
||
Operating Margin (before GW and except.) (%) |
13.2 |
11.1 |
11.6 |
12.5 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
59,997 |
63,215 |
65,701 |
69,056 |
Intangible Assets |
19,800 |
19,898 |
19,898 |
19,898 |
||
Tangible Assets |
40,192 |
43,317 |
45,803 |
49,158 |
||
Investments |
5 |
0 |
0 |
0 |
||
Current Assets |
|
|
12,863 |
16,295 |
18,303 |
19,796 |
Stocks |
296 |
410 |
423 |
430 |
||
Debtors |
9,806 |
12,785 |
13,433 |
13,973 |
||
Cash |
418 |
1,412 |
2,759 |
3,705 |
||
Other |
2,343 |
1,688 |
1,688 |
1,688 |
||
Current Liabilities |
|
|
(9,030) |
(11,213) |
(11,562) |
(11,769) |
Creditors |
(9,030) |
(11,213) |
(11,562) |
(11,769) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(15,876) |
(14,542) |
(14,599) |
(14,650) |
Long term borrowings |
(8,909) |
(7,124) |
(7,124) |
(7,124) |
||
Other long term liabilities |
(6,967) |
(7,418) |
(7,475) |
(7,526) |
||
Net Assets |
|
|
47,954 |
53,755 |
57,843 |
62,434 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
5,862 |
9,416 |
10,514 |
11,524 |
Net Interest |
(629) |
(516) |
(599) |
(633) |
||
Tax |
(316) |
(801) |
(1,312) |
(1,383) |
||
Capex |
(6,286) |
(5,240) |
(5,700) |
(8,000) |
||
Acquisitions/disposals |
0 |
(300) |
(1,050) |
0 |
||
Financing |
(757) |
569 |
0 |
(0) |
||
Dividends |
(249) |
(349) |
(506) |
(562) |
||
Net Cash Flow |
(2,375) |
2,779 |
1,347 |
946 |
||
Opening net debt/(cash) |
|
|
6,116 |
8,491 |
5,712 |
4,365 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
8,491 |
5,712 |
4,365 |
3,419 |
Source: Company accounts, Edison Investment Research
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