Augean — Improving underlying cash flow

Augean (LN: AUG)

Last close As at 27/03/2024

248.50

0.00 (0.00%)

Market capitalisation

261m

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Research: Industrials

Augean — Improving underlying cash flow

No immediate resolution to the dispute with HMRC over landfill taxes is expected and, in the absence of clarity as to the timing and scale of any potential payments, Augean’s management continues to take firm action to improve the strength of the business (disposals/cost control). The difference in market capitalisation between a share price of 25p and our DCF valuation of c 70p/share equates to c £47m and compares to the total of HMRC assessments received so far of £12m (five assessments).

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Industrials

Augean

Improving underlying cash flow

Trading update

Industrial support services

21 March 2018

Price

25.00p

Market cap

£26m

Net debt (£m) at 19 March 2018

8.9

Shares in issue

102.9m

Free float

98%

Code

AUG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.4)

(10.7)

(56.5)

Rel (local)

(5.4)

(5.5)

(55.0)

52-week high/low

66.00p

23.00p

Business description

Formed in 2004, Augean is a UK-based specialist waste management business, working in the hazardous wastes, radioactive waste, and oil and gas sectors.

Next events

IMS

May 2018

Analyst

Graeme Moyse

+44 (0)20 3077 5700

Augean is a research client of Edison Investment Research Limited

No immediate resolution to the dispute with HMRC over landfill taxes is expected and, in the absence of clarity as to the timing and scale of any potential payments, Augean’s management continues to take firm action to improve the strength of the business (disposals/cost control). The difference in market capitalisation between a share price of 25p and our DCF valuation of c 70p/share equates to c £47m and compares to the total of HMRC assessments received so far of £12m (five assessments).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

84.7

6.0

5.6

0.0

4.5

0.0

12/18e

79.5

8.1

6.3

0.0

4.0

0.0

12/19e

79.2

8.8

7.1

0.0

3.5

0.0

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

A tough year in FY17

While revenue rose 11% in FY17, to £84.7m (Edison FY17e £83.2m), operating profit fell to £6.4m (FY16: £7.8m). The main reasons for the decline were increased costs (put in place in H216), issues with a legacy contract at Colt, lower volumes in the soil market and exceptional costs of £8.6m (ongoing restructuring costs and an impairment charge to the carrying value of Colt of £6.3m). Given the continuing uncertainty relating to its landfill tax dispute with HMRC, Augean will not pay a dividend for FY17 (reducing cash outflow by c £1m in FY18). Capex increased to £8.5m (FY16: £8.4m). Nonetheless, end-December net debt was £10.8m, significantly below our forecast of £13.5m, and has fallen further to £8.9m (at 19 March). The lower debt figure was the result of stronger than anticipated operating cash flow (better working capital movements + lower tax and interest payments).

AIS disposal and tax update

Before the results Augean announced the disposal of Augean Integrated Services (AIS) for up to £4.1m. Given the history of losses for this division (FY17: £0.4m), its negative contribution to cash flow and the c £1m of annual capex, the disposal will have a significant beneficial impact on group cash flow. We expect Augean to take similar action with other businesses that fail to generate cash. It remains of the view that there will be no swift resolution to the dispute with HMRC. However, Augean did reveal that HMRC has advised it that its original assessment of £2.8m, relating to the February 2014 quarter, will now be revised downwards by £1.5m (53%), due to the reclassification of the tax banding for certain types of waste.

Valuation: Discount reflects tax uncertainty

We have revised our forecasts to reflect the results and the disposal. We now expect a quicker reduction in net debt (disposal of AIS/absence o70/f dividend payments/lower capex). Our DCF valuation, which excludes the impact of any settlement, indicates an underlying valuation of c 70p (c 11.3x FY18e normalised EPS). The difference in market capitalisation between the share price of 25p and the DCF valuation of 70p/share equates to c £47m and compares to the total of HMRC assessments received so far of £12m (five assessments).

Exhibit 1: Financial summary

£000s

2017

2018e

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

84,691

79,468

79,242

82,015

Cost of Sales

(61,247)

(54,311)

(52,380)

(53,595)

Gross Profit

23,444

25,157

26,862

28,420

EBITDA

 

 

12,941

14,017

15,042

15,878

Operating Profit (before amort. and except & SBP.)

7,003

9,189

9,895

10,514

Intangible Amortisation

(447)

(130)

(100)

(100)

Exceptionals

(8,605)

1,300

0

0

Share Based Payments

(194)

(200)

(200)

(200)

Operating Profit

(2,243)

10,159

9,595

10,214

Associated company

0

0

0

0

Exceptionals

0

0

0

0

Net Interest

(850)

(939)

(926)

(915)

Profit Before Tax (norm)

 

 

5,959

8,051

8,768

9,399

Profit Before Tax (IFRS)

 

 

(3,093)

9,221

8,668

9,299

Tax

(401)

(1,798)

(1,690)

(1,813)

Profit After Tax (norm)

5,752

6,453

7,278

7,786

Profit After Tax (IFRS)

(3,494)

7,423

6,978

7,486

Average Number of Shares Outstanding (m)

102.8

102.9

102.9

102.9

EPS - normalised (p)

 

 

5.59

6.27

7.07

7.56

EPS - normalised and fully diluted (p)

 

5.59

6.27

7.07

7.56

EPS - (IFRS) (p)

 

 

(3.40)

7.21

6.78

7.27

Dividend per share (p)

0.00

0.00

0.00

0.00

Gross Margin (%)

27.7

31.7

33.9

34.7

EBITDA Margin (%)

15.3

17.6

19.0

19.4

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

8.3

11.6

12.5

12.8

BALANCE SHEET

Fixed Assets

 

 

68,001

65,985

65,838

65,583

Intangible Assets

20,080

19,985

19,885

19,785

Tangible Assets

46,678

44,600

44,453

44,189

Investments

1,243

1,400

1,500

1,609

Current Assets

 

 

26,589

35,089

41,761

50,137

Stocks

440

390

376

385

Debtors

19,570

18,363

18,311

18,952

Cash

6,579

16,335

23,074

30,800

Other

0

0

0

0

Current Liabilities

 

 

(18,989)

(17,850)

(17,197)

(17,633)

Creditors

(18,989)

(17,850)

(17,197)

(17,633)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(25,496)

(25,496)

(25,496)

(25,496)

Long term borrowings

(17,378)

(17,378)

(17,378)

(17,378)

Other long term liabilities

(8,118)

(8,118)

(8,118)

(8,118)

Net Assets

 

 

50,105

57,728

64,906

72,591

CASH FLOW

Operating Cash Flow

 

 

10,490

15,130

14,403

15,500

Net Interest

(429)

(939)

(926)

(915)

Tax

(650)

(1,650)

(1,738)

(1,759)

Capex

(8,457)

(5,250)

(5,000)

(5,100)

Acquisitions/disposals

62

2,465

0

0

Financing

28

0

0

0

Dividends

(1,027)

0

0

0

Net Cash Flow

17

9,756

6,739

7,726

Opening net debt/(cash)

 

 

10,816

10,799

1,043

(5,696)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

10,799

1,043

(5,696)

(13,422)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Augean and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Augean and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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