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Research: Industrials
Augean’s (AUG) dispute with HMRC over landfill taxes and tough trading conditions in its key markets creates significant uncertainty. The company has taken decisive steps to reshape its management team and reduce its cost base, in order to provide Augean with a stronger and more dynamic base from which to grow post a resolution to the dispute.
Written by
Augean |
Near-term expectations reduced |
Board changes and trading update |
Industrial support services |
30 October 2017 |
Share price performance
Business description
Next events
Analyst
Augean is a research client of Edison Investment Research Limited |
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Augean’s (AUG) dispute with HMRC over landfill taxes and tough trading conditions in its key markets creates significant uncertainty. The company has taken decisive steps to reshape its management team and reduce its cost base, in order to provide Augean with a stronger and more dynamic base from which to grow post a resolution to the dispute.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
61.0 |
6.2 |
5.58 |
0.65 |
5.7 |
2.0 |
12/16 |
76.0 |
7.2 |
6.47 |
1.00 |
4.9 |
3.1 |
12/17e |
83.2 |
6.0 |
5.56 |
1.20 |
5.8 |
3.8 |
12/18e |
84.3 |
8.1 |
6.88 |
1.44 |
4.7 |
4.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Management changes
Stewart Davies has resigned from his position as CEO, by mutual consent, and is to be replaced by Jim Meredith, who will expand his role as non-executive chairman to become executive chairman. We expect Mr Meredith (acquired 1m shares in October 2017), who has significant experience in the waste industry, including as CEO, to focus his attention on finding a resolution to the dispute with HMRC and maximising the cash return from the business. Augean cautioned that the dispute with HMRC is unlikely to be resolved imminently. The ranks of the non-executive directors have also been strengthened with appointment of Christopher Mills and Roger McDowell. The latter was formerly a board member of Augean (2004-15) and served as interim CEO (2006-7) and interim chairman (2010-12).
Tougher trading but additional cost control
AUG warned that FY17 PBT will below the FY16 level and that FY18 profits will also be below previous expectations (Edison FY18e was £8.3m), mainly the result of continuing weakness in the soil market (volumes and price) and legacy costs associated with Colt. To counter the tough trading, AUG announced additional cost reductions of £1.7m (total target of £3m). To facilitate the cost reduction, AUG will incur an additional one-off exceptional charge of £0.9m (£0.7m announced at H117). The cost savings are expected to yield a full year benefit in FY18.
Reduction to earnings; valuation update
We have updated our forecasts to reflect recent announcements and the H1 results. We now expect FY17 EBITDA of £11.9m (previously £14.8m) and PBT of £6.0m (£7.3m). For FY18, we forecast EBITDA of £14.4m (£16.3m) and PBT of £8.1m (£8.3m). For now our DPS forecasts remain unchanged, but AUG’s ability to pay will need to be assessed in light of the scale of any settlement with HMRC. We forecast lower capex and have reduced our tax rate to 19.5%. Our DCF valuation, which does not include the cost of settling with HMRC, remains at 67p/share. The recent share price weakness now means there is a significant difference between our DCF valuation and the current share price (equivalent to c £34m) reflecting, we believe, the uncertainty surrounding the scale of the potential payment to HMRC.
Exhibit 1: Financial summary
£'000 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
61,005 |
75,959 |
83,212 |
84,295 |
85,918 |
Cost of Sales |
(42,592) |
(51,796) |
(62,474) |
(61,026) |
(62,013) |
||
Gross Profit |
18,413 |
24,163 |
20,738 |
23,269 |
23,905 |
||
EBITDA |
|
|
12,477 |
14,315 |
11,900 |
14,430 |
15,066 |
Operating Profit (before amort. and except & SBP.) |
7,374 |
8,303 |
7,507 |
9,625 |
9,881 |
||
Intangible Amortisation |
(133) |
(262) |
(232) |
(232) |
(232) |
||
Exceptionals |
(3,508) |
(5,719) |
(1,600) |
0 |
0 |
||
Share Based Payments |
(421) |
(243) |
(500) |
(500) |
(500) |
||
Operating Profit |
3,312 |
2,079 |
5,175 |
8,893 |
9,149 |
||
Associated company |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Net Interest |
(788) |
(812) |
(975) |
(1,027) |
(1,027) |
||
Profit Before Tax (norm) |
|
|
6,165 |
7,248 |
6,032 |
8,098 |
8,354 |
Profit Before Tax (IFRS) |
|
|
2,524 |
1,267 |
4,200 |
7,866 |
8,122 |
Tax |
(837) |
(862) |
(819) |
(1,534) |
(1,584) |
||
Profit After Tax (norm) |
5,749 |
6,629 |
5,713 |
7,064 |
7,270 |
||
Profit After Tax (IFRS) |
1,687 |
405 |
3,381 |
6,332 |
6,538 |
||
Average Number of Shares Outstanding (m) |
102.1 |
102.4 |
102.7 |
102.7 |
102.7 |
||
EPS - normalised (p) |
|
|
5.58 |
6.47 |
5.56 |
6.88 |
7.08 |
EPS - normalised and fully diluted (p) |
|
5.58 |
6.47 |
5.56 |
6.88 |
7.08 |
|
EPS - (IFRS) (p) |
|
|
1.60 |
0.40 |
3.29 |
6.16 |
6.36 |
Dividend per share (p) |
0.65 |
1.00 |
1.20 |
1.44 |
1.73 |
||
Gross Margin (%) |
30.2 |
31.8 |
24.9 |
27.6 |
27.8 |
||
EBITDA Margin (%) |
20.5 |
18.8 |
14.3 |
17.1 |
17.5 |
||
Operating Margin (before GW and except.) (%) |
12.1 |
10.9 |
9.0 |
11.4 |
11.5 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
65,205 |
71,913 |
75,263 |
76,425 |
77,054 |
Intangible Assets |
19,971 |
26,262 |
26,030 |
25,798 |
25,566 |
||
Tangible Assets |
42,918 |
44,475 |
48,033 |
49,227 |
50,042 |
||
Investments |
2,316 |
1,176 |
1,200 |
1,400 |
1,446 |
||
Current Assets |
|
|
15,688 |
22,028 |
19,092 |
24,503 |
27,514 |
Stocks |
306 |
379 |
457 |
447 |
454 |
||
Debtors |
11,829 |
18,461 |
16,800 |
16,800 |
17,124 |
||
Cash |
3,553 |
3,188 |
1,834 |
7,256 |
9,936 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(12,857) |
(18,071) |
(13,990) |
(14,965) |
(13,046) |
Creditors |
(11,803) |
(17,900) |
(13,990) |
(14,965) |
(13,046) |
||
Short term borrowings |
(1,054) |
(171) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(13,638) |
(21,303) |
(22,886) |
(22,886) |
(22,886) |
Long term borrowings |
(6,764) |
(13,833) |
(15,333) |
(15,333) |
(15,333) |
||
Other long term liabilities |
(6,874) |
(7,470) |
(7,553) |
(7,553) |
(7,553) |
||
Net Assets |
|
|
54,398 |
54,567 |
57,478 |
63,077 |
68,636 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
12,348 |
12,859 |
8,064 |
14,241 |
12,719 |
Net Interest |
(715) |
(704) |
(975) |
(1,027) |
(1,027) |
||
Tax |
(1,105) |
(941) |
(852) |
(559) |
(1,532) |
||
Capex |
(7,525) |
(8,386) |
(7,950) |
(6,000) |
(6,000) |
||
Acquisitions/disposals |
(1,141) |
(8,901) |
0 |
0 |
0 |
||
Financing |
96 |
187 |
57 |
0 |
0 |
||
Dividends |
(511) |
(665) |
(1,027) |
(1,233) |
(1,479) |
||
Net Cash Flow |
1,447 |
(6,551) |
(2,683) |
5,422 |
2,680 |
||
Opening net debt/(cash) |
|
|
5,712 |
4,265 |
10,816 |
13,499 |
8,077 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
4,265 |
10,816 |
13,499 |
8,077 |
5,397 |
Source: Augean, Edison Investment Research
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