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Augean’s half-year trading update has highlighted a challenging contract issue, which is reducing group profitability and weighing on the company’s outlook. The problem, in the recently acquired Colt business, has resulted in a cut to our PBT forecasts for FY17 and FY18 of 10% and 13% respectively. Furthermore, we reduce our fair value per share to 67p from 80p. Management is taking decisive steps to offset the problem by instigating a £2m cost reduction programme. Despite our profit forecast reduction and the risk of further negative newsflow as contract negotiations near completion in September, we take some comfort from the fact that, despite Augean’s challenges, both our forecasts and management guidance still imply a y-o-y increase in profit before tax.
Written by
Augean |
Trading statement lowers guidance |
Trading update |
Industrial support services |
27 July 2017 |
Share price performance
Business description
Next events
Analysts
Augean is a research client of Edison Investment Research Limited |
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Augean’s half-year trading update has highlighted a challenging contract issue, which is reducing group profitability and weighing on the company’s outlook. The problem, in the recently acquired Colt business, has resulted in a cut to our PBT forecasts for FY17 and FY18 of 10% and 13% respectively. Furthermore, we reduce our fair value per share to 67p from 80p. Management is taking decisive steps to offset the problem by instigating a £2m cost reduction programme. Despite our profit forecast reduction and the risk of further negative newsflow as contract negotiations near completion in September, we take some comfort from the fact that, despite Augean’s challenges, both our forecasts and management guidance still imply a y-o-y increase in profit before tax.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
61.0 |
6.0 |
4.65 |
0.65 |
11.3 |
1.2 |
12/16 |
76.0 |
7.0 |
4.42 |
1.00 |
11.9 |
1.9 |
12/17e |
87.5 |
7.3 |
5.23 |
1.20 |
10.0 |
2.3 |
12/18e |
92.2 |
8.3 |
6.09 |
1.44 |
8.6 |
2.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Legacy contract issue in Colt depresses outlook
A “major legacy contract” within Colt, which was acquired in 2016 and now sits in the Industry & Infrastructure (I&I) division, has been loss-making in the first half. At the time of acquisition, Colt was expected to contribute more than £1m of operating profit in FY17. We now forecast that the whole I&I unit will be loss-making in FY17 and reach break-even in FY18. Management is renegotiating the contract with the customer, expects this process to complete in September and anticipates a positive impact on I&I in the second half of 2017.
Positives and year-on-year growth remain
Our reduction in I&I profits for FY17 and FY18 is partly mitigated by new contract wins in Radioactive Waste Services (RWS), which will contribute £4m in revenues over the next two years. Several other businesses within Augean, such as the legacy I&I business, are performing strongly. Additionally, management has commenced an open-ended £2m efficiency programme. Therefore, despite our reduced forecasts, we still expect y-o-y underlying PBT to grow by 5%.
Valuation and earnings decreased
Our DCF-based fair value per share declines to 67p from 80p as a reflection of our revenue and earnings forecast reduction and an increase in the discount rate we apply to Augean’s cash flows (to 9.3% from 8.7%). We view a higher cost of capital as prudent given heightened operational uncertainty.
Trading statement disappoints
Augean’s half-year trading update was disappointing, with the Colt acquisition in particular proving to be a headwind. Despite this, profit for the first half of 2017 was in line with the previous period.
■
Energy and Construction (E&C): profits slightly down h-o-h as the rise in air pollution control residue (APCR) revenues was more than offset by a decline in other materials. This decline is in line with our previously published forecasts for y-o-y declines in EBITDA and operating profit.
■
Radioactive Waste Services (RWS): profit to improve in FY17 as the company begins to see the benefit from the £4m of new contracts signed. The contracts commenced at the beginning of Q217 and will last for two years, with management guiding to “typical RWS margins”, which we interpret as in excess of 50%.
■
Industry & Infrastructure (I&I): the Colt acquisition has caused severe difficulties in the I&I unit as issues persist with one legacy contract. Management guides to contract negotiations being complete by September with an improvement expected in the second half of 2017.
■
Integrated Services: profit flat h-o-h with waste volumes steady and the East Kent high temperature incinerator reaching break-even by the end of the second half.
■
North Sea Services: H117 profitable versus a £0.3m loss in H116.
Financials and forecasts
We have cut our earnings forecasts principally as a result of the difficulties in I&I (Colt). This is partly offset by an increase in our RWS forecasts to reflect the new contract wins. A summary of these changes is shown in Exhibit 1.
Exhibit 1: Augean earnings forecast changes
£000s |
2017e |
2018e |
New Energy & Construction Operating Profit |
7,523 |
7,817 |
Old Energy and Construction Operating Profit |
7,523 |
7,817 |
+/- New vs old |
0.0% |
0.0% |
New Radioactive Waste Services Operating Profit |
998 |
1,226 |
Old Radioactive Waste Services Operating Profit |
520 |
1,135 |
+/- New vs old |
91.9% |
8.0% |
New Industry & Infrastructure Operating Profit |
(298) |
23 |
Old Industry and Infrastructure Operating Profit |
1,035 |
1,323 |
+/- New vs old |
(128.7%) |
(98.3%) |
New Augean Integrated Services Operating Profit |
638 |
825 |
Old Augean Integrated Services Operating Profit |
638 |
825 |
+/- New vs old |
0.0% |
0.0% |
New North Sea Services Operating Profit |
934 |
964 |
Old North Sea Services Operating Profit |
934 |
964 |
+/- New vs old |
0.0% |
0.0% |
New Central costs |
(1,420) |
(1,491) |
Old Central costs |
(1,420) |
(1,491) |
+/- New vs old |
0.0% |
0.0% |
New Operating profit (clean) |
8,376 |
9,364 |
Old Operating profit (clean) |
9,230 |
10,573 |
+/- New vs old |
(9.3%) |
(11.4%) |
New PBT (clean) |
7,334 |
8,322 |
Old PBT (clean) |
8,188 |
9,531 |
+/- New vs old |
(10.4%) |
(12.7%) |
DPS (pence) |
1.20 |
1.44 |
DPS (pence) |
1.20 |
1.44 |
+/- New vs old |
0.0% |
0.0% |
New net debt |
9,924 |
7,898 |
Old net debt |
9,014 |
5,996 |
+/- New vs old |
10.1% |
31.7% |
Source: Edison Investment Research
Fair value reduced from 80p to 67p
We reduce our PBT forecasts by 10% for FY17 and 13% for FY18, which accounts for some of the reduction in our fair value per share. The other factor is an increase in the discount rate we apply to Augean’s cash flows in our DCF model. Our new post-tax WACC is 9.3% versus 8.7% previously. The uplift is a function of an increase in our assumed beta from 0.8 to 0.9 to reflect increased volatility from current difficult trading conditions. We maintain a terminal growth rate of 1%. The implied fair value per share is 67p, which offers 28% upside to the current price of 52.5p.
Exhibit 2: Financial summary
£'000 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
||||||
Revenue |
|
|
61,005 |
75,959 |
87,471 |
92,197 |
97,272 |
EBITDA |
|
|
11,923 |
13,810 |
14,816 |
16,262 |
17,550 |
Operating Profit (before amort. and except.) |
6,820 |
7,798 |
8,376 |
9,364 |
10,161 |
||
Intangible Amortisation |
133 |
262 |
0 |
0 |
0 |
||
Exceptionals |
3,508 |
5,719 |
700 |
0 |
0 |
||
Operating Profit |
10,461 |
13,779 |
9,076 |
9,364 |
10,161 |
||
Associated company |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Net Interest |
(788) |
(812) |
(1,042) |
(1,042) |
(1,042) |
||
Profit Before Tax (norm) |
|
|
6,032 |
6,986 |
7,334 |
8,322 |
9,119 |
Profit Before Tax (IFRS) |
|
|
9,673 |
12,967 |
8,034 |
8,322 |
9,119 |
Tax |
(1,227) |
(2,464) |
(1,980) |
(2,080) |
(2,188) |
||
Profit After Tax (norm) |
4,805 |
4,522 |
5,354 |
6,241 |
6,930 |
||
Profit After Tax (IFRS) |
8,446 |
10,503 |
6,054 |
6,241 |
6,930 |
||
Average Number of Shares Outstanding (m) |
102.1 |
102.4 |
102.4 |
102.4 |
102.4 |
||
EPS - normalised (p) |
|
|
4.65 |
4.42 |
5.23 |
6.09 |
6.77 |
EPS - normalised and fully diluted (p) |
|
4.53 |
4.34 |
5.14 |
5.99 |
6.65 |
|
EPS - (IFRS) (p) |
|
|
8.22 |
10.25 |
5.91 |
6.09 |
6.77 |
Dividend per share (p) |
0.65 |
1.00 |
1.20 |
1.44 |
1.73 |
||
EBITDA Margin (%) |
19.5 |
18.2 |
16.9 |
17.6 |
18.0 |
||
Operating Margin (before GW and except.) (%) |
11.2 |
10.3 |
9.6 |
10.2 |
10.4 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
65,205 |
71,913 |
74,028 |
76,294 |
78,722 |
Intangible Assets |
22,287 |
27,438 |
27,438 |
27,438 |
27,438 |
||
Tangible Assets |
42,918 |
44,475 |
46,590 |
48,856 |
51,284 |
||
Investments |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
15,688 |
22,028 |
25,771 |
28,962 |
32,708 |
Stocks |
306 |
379 |
433 |
448 |
470 |
||
Debtors |
11,829 |
18,461 |
21,259 |
22,407 |
23,641 |
||
Cash |
3,553 |
3,188 |
4,080 |
6,106 |
8,597 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
12,857 |
18,071 |
20,505 |
21,195 |
22,208 |
Creditors |
11,803 |
17,900 |
20,334 |
21,024 |
22,037 |
||
Short term borrowings |
1,054 |
171 |
171 |
171 |
171 |
||
Long Term Liabilities |
|
|
13,638 |
21,303 |
21,303 |
21,303 |
21,303 |
Long term borrowings |
6,764 |
13,833 |
13,833 |
13,833 |
13,833 |
||
Other long term liabilities |
6,874 |
7,470 |
7,470 |
7,470 |
7,470 |
||
Net Assets |
|
|
107,388 |
133,315 |
141,607 |
147,754 |
154,941 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
12,348 |
12,859 |
13,698 |
15,788 |
17,307 |
Net Interest |
(715) |
(704) |
(1,042) |
(1,042) |
(1,042) |
||
Tax |
(1,105) |
(941) |
(1,980) |
(2,080) |
(2,188) |
||
Capex |
(7,474) |
(8,335) |
(8,555) |
(9,164) |
(9,816) |
||
Acquisitions/disposals |
(91) |
(8,901) |
0 |
0 |
0 |
||
Financing |
460 |
614 |
0 |
0 |
0 |
||
Dividends |
(511) |
(665) |
(1,229) |
(1,475) |
(1,770) |
||
Net Cash Flow |
2,912 |
(6,073) |
892 |
2,027 |
2,491 |
||
Opening net debt/(cash) |
|
|
5,712 |
4,265 |
10,816 |
9,924 |
7,898 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
(1,465) |
(478) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
4,265 |
10,816 |
9,924 |
7,898 |
5,407 |
Source: Augean accounts, Edison Investment Research
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