Augean — Update 30 November 2016

Augean (LN: AUG)

Last close As at 28/03/2024

248.50

0.00 (0.00%)

Market capitalisation

261m

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Research: Industrials

Augean — Update 30 November 2016

Augean

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Industrials

Augean

Decommissioning the doubters

New partnership announced

Industrial support services

30 November 2016

Price

65.0p

Market cap

£67m

Net debt (£m) at H116

12.9

Shares in issue

102.5m

Free float

100%

Code

AUG

Primary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

21.9

32.6

18.0

Rel (local)

25.3

34.2

11.8

52-week high/low

65.0p

40.0p

Business description

Augean manages hazardous waste through a divisional structure of five businesses: Radioactive Waste Services (3% of group revenues), Energy & Construction (37%), Industry & Infrastructure (21%), Augean Integrated Services – AIS (11%) and Augean North Sea Services – ANSS (27%).

Next events

FY16 results

22 March 2017

Analysts

Jamie Aitkenhead

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Augean is a research client of Edison Investment Research Limited

Augean has announced a partnership with the Port of Dundee to treat hazardous waste arising from the growing market for oil and gas platform decommissioning. While we only increase our 2018 group operating profit forecasts by 2.5% to reflect the new venture, we are positive about the scale of the opportunity for energy infrastructure decommissioning (decom) as North Sea production assets reach the end of their lives. Augean’s unique ability to offer integrated hazardous waste treatment and disposal places it in a strong position to benefit from this market as it develops in the years and decades ahead.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

61.0

6.0

4.65

0.65

14.0

1.0

12/16e

61.8

6.8

5.26

0.80

12.4

1.2

12/17e

68.4

8.8

6.78

1.00

9.6

1.5

12/18e

72.9

9.8

7.54

1.20

8.6

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Shift to decommissioning welcomed by shareholders

On 14 November Augean announced that it had entered into a partnership with the Port of Dundee to open a specialist waste facility for offshore energy decommissioning projects. The move is consistent with Augean’s strategy in its Augean North Sea Services (ANSS) unit of diversifying away from oil drilling-related waste, which has declined in tandem with falling North Sea oil production. The 24% rally in the share price since the news is, we believe, a reflection of market support for the strategic shift to decommissioning waste, a potentially lucrative growth market.

Earnings raised: Decommissioning the doubters

We increase our overall group operating profit forecasts by 0.2% in FY17 and 2.5% in FY18 to reflect the increase in ANSS revenues. However, this business line could have a more material impact on Augean’s outlook and valuation in the future. Decommissioning is at an early stage globally, so forecasting industry trends and cash flow for a single company is complex. We therefore outline industry drivers from a high level and conduct (in Exhibit 4) an earnings sensitivity analysis to show how material this opportunity could be in a range of scenarios. Over the course of 2017, as Augean and the Port of Dundee approach the commissioning date for the new facility, we would expect more detailed guidance from Augean’s management.

Valuation: Increased earnings drive FV increase

We change our fair value per share from a range 60-90p/share to a blended average of 80p/share. Our valuation is an average of an NPV, EVA and a sector-based EBITDA multiple. Our NPV of 90p/ share increased mechanically due to the earnings contribution from the new partnership in our explicit cash flow projections to 2018. We also apply a EV/EBITDA multiple of 5.7x to our increased one-year forward EBITDA estimates, which gives a fair value per share of 84p. EVA implies a valuation of 62p.

Decom: Earnings enhancing, but more besides

We believe that the announcement on 14 November of Augean’s partnership with the Port of Dundee to open a Decom Waste Management Hub offers Augean and its shareholders a positive earnings story over the coming years. More importantly, however, it gives Augean a toe-hold in the growth market of decommissioning North Sea energy infrastructure. Finally, it demonstrates the company’s market leadership in the integrated treatment and disposal of hazardous waste, a capability that transfers to a number of industrial sectors, which are legally required to pay for hazardous waste to be treated and disposed of responsibly.

The decom market: Early-stage and politically sensitive, but huge potential

According to an Oil and Gas UK research report (Decommissioning Insight 2016), £17.6bn will be spent on decommissioning oil and gas infrastructure between 2016 and 2025. The report estimates that 895,000 tonnes of infrastructure will come onshore to be processed and recycled over the same period and that it will require spending of £214m on onshore recycling and waste disposal. It is noteworthy that Oil and Gas UK believes the peak years for the emerging decommissioning industry will not be until midway through the 2020s.

Exhibit 1: Ports and yards active in decommissioning

Source: Decom North Sea

Exhibit 1 shows several of the most important port and decommissioning yards for the North Sea in the UK and continental Europe. According to Decom North Sea, there are currently 46 decommissioning projects under way in the North Sea. Scrap recycling and hazardous waste treatment (Onshore recycling in Exhibit 2) only constitutes a small part of the overall industry size, with items such as well plugging and abandonment comprising the bulk of the overall forecast spend.

Oil decommissioning has a high degree of political sensitivity, especially in Scotland. There was a backlash from GMB and the press after Maersk Oil sent its Janice Floating Production Unit to Norway to be decommissioned. It was reported at the time that the work was carried out in Norway as the Scottish government was reluctant to support the decommissioning industry, as it did not fit with its political narrative of high future output and cash flow from North Sea oil.

This chimes with the fact that, in 2014, the Scottish government published a paper, Scotland’s Independent Expert Commission on Oil and Gas: Maximising the Total Value Added, in which it recommended that a proposed decommissioning regulator should have “the authority to delay, refuse or amend a decommissioning application”. However, by the summer of this year, First Minister Nicola Sturgeon appeared more resigned to decommissioning and indeed supportive of the nascent industry as a potential job creator. She said in the Holyrood parliament: “although we do not want to see premature decommissioning in the North Sea, decommissioning nevertheless is a massive economic opportunity for us”.

The long-term potential for the decommissioning industry is significant. We would argue, however, that there is very obvious potential for delays in the industry as a whole as it could be in the interests of both the UK government and the energy sector to delay decommissioning. Under UK law, the Westminster government funds half of decommissioning costs through tax rebates. Given the pressure on both energy companies’ and central government finances, it is entirely conceivable that decommissioning revenues take longer to materialise than currently forecast.

The Oil and Gas Authority (OGA), which regulates the oil and gas sectors as a whole, is a significant player in the sector. In its July 2016 Decommissioning Strategy, the OGA outlined its strategic objective as Maximising the Economic Recovery (MER) of the UK Continental Shelf by: prioritising cost certainty and reduction, decommissioning delivery capability and decommissioning scope, guidance and stakeholder engagement. The OGA is the most influential regulatory actor in UK oil and gas sector in general and decom specifically. Beyond its regulatory authority, it also has the power to issue licences and sanctions (fines) in the sector and is in overall control of budgeting in the decommissioning space.

The partnership: A sensible combination of skills

The Port of Dundee is one of several in the UK to have realised the potential of decommissioning and invested capital in equipping its facilities with the ultra-heavy lifting facilities required to receive ‘topsides’ (the above-sea superstructure of a platform) into port. In its announcement, Forth Ports (the owner of the Port of Dundee) said it would invest £10m on a new quayside and heavy-lift capability to complement its existing deep-water berth and 60 acre land area. This will complete the three necessary pieces of infrastructure to carry out decommissioning work – draft, weight-loading facility and waste services infrastructure.

The partnership is consistent with Augean’s strategy in ANSS. Management has publicly stated its goal to win “new contracts for production platform, onshore waste management and decommissioning, diversifying away from exploration drilling waste management”. Augean hopes to have the requisite hazardous waste treatment permits in place by early 2017, with the facility expected to be fully operational by late 2017. By definition, the revenue stream from the partnership will be lumpy, with no framework contract in place, so forecasting earnings is difficult.

Forecast update: 2018 ANSS EBIT upgraded by 27% (2.5% at group level)

We estimate that ANSS will receive £2m of revenues from the partnership in 2018, which will produce £240k of operating profit based on a 12% margin. This would significantly increase our segmental operating profit forecasts by 27%, although the impact at group level is only 2.5% based on our forecast assumptions. We wait for more concrete news from management about future potential revenues as the installation nears commissioning in late 2017, but we would expect the facility to handle the decommissioning (scrap and waste treatment) of between four and six topsides pa when fully ramped up towards the end of the decade. We believe Augean’s revenue per project could be in the range of £500k to £1m. Long-term forecasting will be imprecise due to intermittent revenues from project work. Exhibit 2 shows the estimated impact of the Dundee partnership on the ANSS segment and group operating profit to 2018.

Exhibit 2: Port of Dundee contract: estimated segment and group earnings impact

£000s

2015

2016e

2017e

2018e

ANSS revenues pre-Dundee

14,900

12,058

12,058

12,058

ANSS revenues post-Dundee

14,900

12,058

12,308

14,058

% change

0.0%

0.0%

2.1%

16.6%

ANSS operating profit pre-Dundee

1,340

897

897

897

ANSS operating profit post-Dundee

1,340

897

927

1,136

% change

0.0%

0.0%

3.3%

26.6%

Group operating profit pre-Dundee

6,820

7,807

9,955

10,398

Group operating profit post-Dundee

6,820

8,089

10,340

10,663

% change

0.0%

3.6%

3.9%

2.5%

Source: Augean, Edison Investment Research. Note: Only shows Dundee impact, not other forecast changes.

We also take the opportunity to tweak the rest of our forecasts to bring them in line with the current trading conditions, although the net effect of this is immaterial.

Exhibit 3: Earnings forecast changes

EPS (p)

EBIT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

5.27

5.26

-0.2

7.8

7.8

-0.2

13.7

13.7

-0.2

2017e

6.76

6.78

0.2

10.0

10.0

0.2

16.5

16.5

0.0

2018e

7.33

7.54

2.8

10.4

10.7

2.5

17.5

17.7

1.2

Source: Edison Investment Research

Valuation: Fair value range nudged up, but further value may materialise

Until we have a clearer idea of the cash flow opportunity from the Dundee partnership, we do not attribute significant value to it. We explicitly forecast three-year forward cash flow, which incorporates the expected c £240k of EBIT and operating cash flow in 2018. This nudges up our NPV fair value per share by 2p to 90p. However, we acknowledge that this does not capture the potential future value. Exhibit 4 explores potential revenue and EBIT contributions from the Dundee partnership in more detail.

Exhibit 4: Earnings sensitivity analysis

ANSS Dundee partnership earnings sensitivity

2018e

2019e

2020e

Bear case topsides per annum

0

2

4

Bull case topsides per annum

3

5

6

Bear case revenue per project

£500,000

£500,000

£500,000

Bull case revenue per project

£1,000,000

£1,000,000

£1,000,000

Bear case revenue contribution

£0

£1,000,000

£2,000,000

Bull case revenue contribution

£3,000,000

£5,000,000

£12,000,000

Bear case EBIT/EBITDA margin

7.5%

7.5%

7.5%

Bull case EBIT/EBITDA margin

15.0%

15.0%

15.0%

Bear case EBIT/EBITDA

£0

£75,000

£150,000

Bull case EBIT/EBITDA

£450,000

£750,000

£1,800,000

Source: Augean, Edison Investment Research

We increase our fair value from a range of 60-90p to a blended average of 80p (NPV, EVA and sector-based target EV/EBITDA). The increase in valuation reflects our explicit forecasts of the ANSS project plus other small changes at divisional level. We compare Augean to its closest UK-based and international peers. If we applied a European waste sector average one-year forward EV/EBITDA multiple (5.7x) on our revised earnings for Augean, it would imply a fair value per share of 84p (from 90p previously based on target P/E). We take an average of this number, our NPV-derived fair value per share of 90p (from 88p; post-tax WACC 8.5%, terminal growth 1%) and an EVA analysis (62p; previously 60p) in arriving at our fair value of 80p.

Exhibit 5: Augean peer comparison

Company

Share Price (local)

Market cap (local m)

Dividend yield

Current P/E

Next P/E

Current EV/ EBITDA

Next EV/ EBITDA

FCF Yield

Net debt to +1y EBITDA

Shanks Group PLC

88.25

538

0.0%

18.8

17.3

9.3

6.6

3.8%

3.2x

Suez

13.24

7,473

4.9%

17.3

15.0

5.9

5.6

4.4%

3.0x

Veolia Environnement SA

16.34

9,205

4.5%

16.5

13.7

5.5

5.2

5.7%

2.5x

Seche Environnement SA

26.23

206

3.6%

12.3

11.4

5.5

5.3

-8.4%

3.2x

Average Europe Listed

 

3.3%

16.2x

14.4x

6.5x

5.7x

1.4%

3.0x

Clean Harbors Inc

51.67

2,965

0.0%

N/A

57.2

10.3

8.8

5.7%

3.0x

Waste Management Inc

70.11

30,987

2.2%

24.1

22.2

10.8

10.3

5.2%

2.4x

Average US Listed

 

1.1%

24.1

39.7x

10.6x

9.5x

5.5%

2.7x

Cleanaway Waste Management Ltd

1.11

1,758

1.5%

24.0

20.1

6.9

6.6

4.1%

1.0x

Tox Free Solutions Ltd

2.41

437

3.7%

14.0

12.9

6.2

5.4

7.7%

1.2x

Average Australia Listed

 

2.6%

19.0x

16.5x

6.5x

6.0x

5.9%

1.1x

Average Global

 

 

2.6%

18.2x

21.2x

7.5x

6.7x

3.5%

2.5x

Augean

65.00

67

1.6%

10.4x

8.1x

5.3x

5.1x

5.0%

0.5x

Source: Edison Investment Research, Bloomberg. Note: Prices as at 28 November 2016.

Exhibit 6: Financial summary

£'000

2013

2014

2015

2016e

2017e

2018e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

47,123

55,204

61,005

61,774

68,387

72,944

Cost of Sales

(31,368)

(38,852)

(42,592)

(42,370)

(46,128)

(49,520)

Gross Profit

15,755

16,352

18,413

19,404

22,259

23,424

EBITDA

 

 

8,906

10,033

12,056

13,683

16,538

17,702

Operating Profit (before amort. and except.)

6,235

6,146

6,820

7,791

9,976

10,663

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

(6,250)

823

(3,508)

(1,000)

(100)

0

Operating Profit

(15)

6,969

3,312

6,791

9,876

10,663

Associated company

(13)

(5)

0

0

0

0

Exceptionals

0

0

0

0

0

0

Net Interest

(674)

(759)

(788)

(982)

(1,204)

(906)

Profit Before Tax (norm)

 

 

5,548

5,382

6,032

6,810

8,772

9,757

Profit Before Tax (IFRS)

 

 

(702)

6,205

2,524

5,810

8,672

9,757

Tax

(977)

(1,125)

(837)

(1,430)

(1,842)

(2,049)

Profit After Tax (norm)

4,571

4,257

5,195

5,380

6,930

7,708

Profit After Tax (IFRS)

(1,679)

5,080

1,687

4,380

6,830

7,708

Average Number of Shares Outstanding (m)

99.7

100.1

102.1

102.2

102.2

102.2

EPS - normalised (p)

 

 

4.48

4.13

4.65

5.26

6.78

7.54

EPS - normalised and fully diluted (p)

 

4.48

4.01

4.53

5.26

6.78

7.54

EPS - (IFRS) (p)

 

 

(1.79)

4.92

1.60

4.28

6.68

7.54

Dividend per share (p)

0.35

0.50

0.65

0.80

1.00

1.20

Gross Margin (%)

33.4

29.6

30.2

31.4

32.5

32.1

EBITDA Margin (%)

18.9

18.2

19.8

22.2

24.2

24.3

Operating Margin (before GW and except.) (%)

13.2

11.1

11.2

12.6

14.6

14.6

BALANCE SHEET

Fixed Assets

 

 

59,997

63,215

62,889

74,118

75,806

77,143

Intangible Assets

19,800

19,898

19,971

19,971

19,971

19,971

Tangible Assets

40,192

43,317

42,918

54,147

55,835

57,172

Investments

5

0

0

0

0

0

Current Assets

 

 

12,863

16,295

18,004

24,307

26,072

27,402

Stocks

296

410

306

310

343

366

Debtors

9,806

12,785

11,829

13,378

15,110

16,417

Cash

418

1,412

3,553

8,303

8,303

8,303

Other

2,343

1,688

2,316

2,316

2,316

2,316

Current Liabilities

 

 

(9,030)

(11,213)

(10,838)

(24,367)

(21,778)

(17,838)

Creditors

(9,030)

(11,213)

(10,838)

(10,975)

(12,149)

(12,959)

Short term borrowings

0

0

0

(13,393)

(9,629)

(4,879)

Long Term Liabilities

 

 

(15,876)

(14,542)

(15,657)

(16,810)

(17,115)

(17,319)

Long term borrowings

(8,909)

(7,124)

(7,818)

(7,818)

(7,818)

(7,818)

Other long term liabilities

(6,967)

(7,418)

(7,839)

(8,992)

(9,297)

(9,501)

Net Assets

 

 

47,954

53,755

54,398

57,248

62,986

69,388

CASH FLOW

Operating Cash Flow

 

 

5,862

9,416

12,348

12,267

15,947

17,182

Net Interest

(629)

(516)

(715)

(982)

(1,204)

(906)

Tax

(316)

(801)

(1,105)

(1,430)

(1,842)

(2,049)

Capex

(6,286)

(5,742)

(7,616)

(7,921)

(8,250)

(8,376)

Acquisitions/disposals

0

0

0

(9,200)

0

0

Financing

(757)

771

(954)

0

0

0

Dividends

0

(349)

(511)

(665)

(818)

(1,022)

Net Cash Flow

(2,126)

2,779

1,447

(7,931)

3,834

4,829

Opening net debt/(cash)

 

 

6,116

8,491

5,712

4,265

12,908

9,144

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

(712)

(70)

(79)

Closing net debt/(cash)

 

 

8,242

5,712

4,265

12,908

9,144

4,394

Source: Augean, Edison Investment Research

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10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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