Augean — Strong underlying performance in FY19

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 — Strong underlying performance in FY19

FY19 results were ahead of our expectations on an underlying basis and extended the recovery in profitability evident since 2017. With the financial liability to HMRC now discharged and strong growth expected in Augean’s key markets, we believe that the company is well positioned to continue to deliver returns for shareholders.

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Industrials

Augean

Strong underlying performance in FY19

FY19 results

Industrial support services

28 February 2020

Price

215p

Market cap

£224m

Net debt (£m) at 31 December 2019

13.2

Shares in issue

104.1m

Free float

35.1%

Code

AUG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.4

21.1

160.6

Rel (local)

12.4

31.4

168.5

52-week high/low

225.0p

85.5p

Business description

Augean is a UK-based specialist waste management business. The business operates via two divisions: Treatment & disposal and North Sea Services

Next events

AGM

April 2020

Analyst

Graeme Moyse

+44 (0)20 3077 5700

Augean is a research client of Edison Investment Research Limited

FY19 results were ahead of our expectations on an underlying basis and extended the recovery in profitability evident since 2017. With the financial liability to HMRC now discharged and strong growth expected in Augean’s key markets, we believe that the company is well positioned to continue to deliver returns for shareholders.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

79.7

11.5

9.1

0.0

23.6

N/A

12/19

107.1

19.3

21.0

0.0

10.2

N/A

12/20e

120.8

22.8

17.9

0.0

12.0

N/A

12/21e

131.5

26.4

20.7

0.0

10.4

N/A

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

Underlying FY19 results exceed forecasts

Despite four management upgrades to FY19 market expectations during the year, Augean succeeded in surpassing our forecasts. Underlying PBT of £19.2m was £0.8m ahead of our estimates, powered by volume growth across all business segments and margin improvement (contributing £3.1m of extra profitability). Exceptional cash payments of £44.5m made in December, including £40.4m to HMRC and £4.0m for the Long Term Incentive Plan (LTIP), meant that net debt of £13.2m was worse than forecast, although on an underlying basis it was slightly ahead of our expectation of net cash of £30m (-£13.2m + £44.5m = £31.3m). Despite the payments in FY19, the balance sheet remains robust, with an FY19 net debt/equity ratio of 27.9%.

Extending the growth profile

FY19 results marked a continuation of the improvement in the profitability of the business seen in recent years, with a compound annual growth rate (CAGR) in revenue of 19% and 31% in EBITDA (2016–19). Since FY17, the return on capital employed (ROCE) has improved from 9% to 37.3% in 2019. It is also worth highlighting that net debt of £13.2m compares to net debt of £10.8m in FY17, during which period Augean settled the outstanding landfill tax liability with HM Revenue & Customs (HMRC). Having achieved a turnaround in the business, Augean is well placed, with strong market positions in its constituent businesses to achieve further growth for its shareholders. We estimate that Augean will continue to generate cash at the rate of c £1.5–2.0m per month, eliminating net debt during FY20.

Valuation: Upside despite recent share price strength

Following the FY19 results we have updated our forecasts (only small incremental changes) and valuation analysis. Based on peer group multiples we believe that Augean could be worth c 276p/share. For the purposes of our analysis we have not assumed any rebate of the landfill tax payment to HMRC (total payment worth 39p/share). Despite the recent strong share price performance, we still see potential for additional upside.

Focus on growth

FY19: Strong underlying results beat our forecasts

Augean’s headline figures for FY19 were distorted by two significant events that occurred during the course of the year and which were accounted for as non-underlying items, in total amounting to £34.5m (of which the settlement of landfill tax assessments with HMRC accounted for £26.2m and share-based payments a further £7.7m). The cash payments associated with these two events were £40.4m for landfill tax assessments and £4.0m for the cash cost of the LTIP (December 2019).

Exhibit 1: Augean FY19 vs FY18 – key figures

£000s

FY18

FY19

Comments

Revenue (excluding Landfill tax)

75,820

91,526

Excludes landfill tax

Adjusted operating profit

12,186

19,909

Strong growth (£7.7m) in adjusted operating profit

Share-based payments and exceptional items

(845)

(34,536)

Charges against HMRC assessments and share-based payments

Operating profit

11,341

(14,627)

 

Profit before tax (reported)

10,593

(15,324)

Adjusted FY19 PBT of £19.2m shown in Exhibit 2 below.

EPS (reported basic)

9.61

(12.26)

 

Net cash/(debt)

8,240

(13,202)

FY19 struck after payments to HMRC and cash LTIP (see above)

Source: Augean, Edison Investment Research

However, Augean's underlying results for FY19 demonstrated impressive year-on-year growth. On an adjusted basis, revenue increased by 33% to £91.5m (excluding the landfill tax), while adjusted EBITDA rose by 52% to £28.8m and adjusted PBT 68% to £19.2m. The performance exceeded our forecasts for EBITDA of £27.1m and PBT of £18.4m. Exhibit 2 shows the adjustments to PBT.

Exhibit 2: Reconciliation of headline PBT to underlying PBT

£000s

Statutory PBT

Share-based payments

Non-underlying items

Adjusted PBT

FY19

(15,324)

7,693

26,843

19,212

Source: Augean

The better than expected results were achieved thanks to strong sales growth across all divisions: Treatment and disposal (+24%) and North Sea Services (+61%). The T&D business was boosted by a 12% increase in residues from energy from waste (EfW) plants despite the absence of any new plants commencing operation in FY19. The business also benefited from a 46% increase in soil volumes helped by a full year from the impact of the soils sales team, which returned in FY18.

As Exhibit 3 highlights, underlying cash flow also remained strong, with FY19 net cash generation of £24.5m (FY18: £20m). Once again the headline figures were distorted by an exceptional payment of £44.5m (LTIP + HMRC payment), which led to a net cash outflow of £20m. However, financing totalling £30.5m increased the cash balance by c £10.5m (Exhibit 7). Despite the scale of the exceptional payments, the balance sheet remains strong, with net debt of £13.2m, representing a net debt/equity ratio of 27.9% and net debt/EBITDA of c 0.5x (banking covenants 2.5x).

Exhibit 3: Simplified cash flow before financing

£m

2018

2019

EBITDA

18.9

28.8

Net working capital

(0.3)

(0.5)

Interest tax and other

(1.4)

(1.3)

Net operating cash flows

17.2

27.0

Capex

(3.4)

(5.8)

Sale of businesses and assets

6.2

3.3

Net cash generation

20.00

24.5

Exceptional items

(0.3)

(44.5)

Net cash flow

19.70

(20.00)

Source: Augean

FY19 in context: Further evidence of turnaround

The FY19 results represent only the latest instalment of an impressive turnaround in the fortunes of the business under the aegis of Jim Meredith (appointed executive chairman in October 2017), Mark Fryer (FD) and John Rauch (COO). The focus on disposal of underperforming businesses, cost control and cash management has transformed Augean’s financial profits, as shown in Exhibit 4. Notably, EBITDA in FY19 was almost double the figure for FY17.

Exhibit 4: Evidence of significant improvement in financial performance

Period end
net (debt)/cash (£m)

EBITDA
(£m)

Annualised
ROCE

FY17

(10.8)

14.5

9%

FY18

8.2

18.9

21.6%

FY19

(13.2)*

28.8

37.3%

Source: Augean. Note: *The FY19 cash balance is struck after the payment of the landfill tax liability to HMRC of £40.4m and the cash LTIP of £4.0m.

Strategy

The strategy for the business is to eliminate net debt (£13.2m), optimise returns on capital and support the drive for growth in its key markets. As we have seen Augean made a payment of £40.4m to HMRC in 2019 for outstanding landfill tax (LFT) liabilities enabling it to prevent further accrual of interest and receive a corporation tax deduction. However, Augean continues to challenge the LFT assessments and awaits the First Tier Tax Tribunal hearing, expected no earlier than late 2020.

Outlook

We continue to take a positive view on the prospects for Augean. FY19 demonstrated good growth across all divisions and we expect that Augean will continue to grow given the strong market positions of its underlying businesses (Augean has c 40% of UK hazardous waste landfill capacity), which have demonstrated high ROCE and high EBITDA margins. In particular, we expect a strong performance from the ash business as volumes rise, boosted by EfW plants scheduled to come online during the course of the year.

Financials and valuation

Following the FY19 results we have made only small incremental refinements to our forecasts (see Exhibit 5). The only significant change relates to the cash position following the impact of the HMRC and LTIP payments. As stated above, the growth that we expect is driven largely by ash volumes from EfW plants. If all six EfW plants contracted by Augean were to commence operation in FY20 (at the start of the year), they would contribute a theoretical maximum of 60,000 tonnes to ash volumes (2019: c 210,000 tonnes of total ash volumes). In reality, the FY20 contribution is likely to be much less than that due to delays and part year operation – we assume an additional c 25,000 tonnes. We do not include any dividend payments in our forecasts and Augean has stated that it will not pay dividends while it is carrying net debt on its balance sheet. Once net debt has been eliminated, Augean may choose to revisit this decision, although it is important to stress that it has made no commitment to do so.

Exhibit 5: Changes to forecasts, FY20–23e

Revenue (£m)

PBT* (£m)

Net cash (£m)

Old

New

% change

Old

New

% change

Old

New

% change

FY20e

120.1

120.8

0.6

22.8

22.8

0.0

52.7

4.8

-90.9

FY21e

132.0

131.5

-0.4

26.5

26.4

-0.4

79.4

27.0

-66.0

FY22e

141.4

141.4

0.0

31.3

31.3

0.0

109.7

57.2

-47.9

FY23e

151.4

151.6

0.1

35.1

35.2

0.3

143.9

89.7

-37.7

Source: Edison Investment Research. Note: *PBT shown is normalised.

Since we last published on the company (October 2019), Augean’s share price has risen from 150p to 215p and, driven by greater certainty surrounding the HMRC liability, the rating of the shares has also increased, from a forward P/E ratio of 10.1x in October, to 12.0x now. The shares are currently trading towards the top end of our previously identified range of 175–225p.

Following the FY19 results, we have also updated our valuation analysis to reflect market movements in peer group valuations and changes to our forecasts. We consider EV/EBITDA and P/E valuations for a small group of selected peers for FY1 and FY2, establishing peer group averages for each category and then applying the multiples to our forecasts for FY1 and FY2 for Augean. The average of our analysis indicates a value of 276p/share (an FY20e P/E of c 15.4x). The analysis takes no account of any potential rebate that might be received as a result of arbitration on the landfill tax dispute with HMRC. Although we do not expect a resolution to the dispute in 2020, it is worth remembering that the £40.4m paid by Augean amounts to c 39p/share. Even a partial rebate of the total payment could deliver an additional meaningful reward to shareholders.

Exhibit 6: Augean peer group valuation analysis

Country

Code

Currency

FY1

Market cap

Price

P/E (x)

EV/EBITDA (x)

Dividend yield
(%)

(local)

FY1

FY2

FY1

FY2

FY1

FY2

Renewi

UK

RWI

p

Mar-21

319

40

9.1

8.3

6.1

6.0

4.7

4.8

Veolia Environnement

France

VIE

Dec-20

15,814

28

20.3

18.5

7.3

7.1

3.8

4.1

Suez

France

SEV

Dec-20

9,763

16

23.7

20.2

7.6

7.4

4.2

4.2

Clean Harbors (CLH)

US

CLH

$

Dec-20

4,725

85

37.6

32.3

10.6

10.1

n/a

n/a

Average

22.7

19.8

7.9

7.7

4.2

4.4

Average (excluding CLH)

17.7

15.7

7.0

6.8

4.2

4.4

Edison forecasts for Augean

EPS (p/share)

 

 

 

 

 

17.9

20.7

EBITDA (£000)

 

 

 

 

 

33,189

37,228

DPS (p/share)

 

 

 

 

 

N/A

N/A

Implied equity value excluding CLH (p/share)

 

 

 

 

 

316

324

232

230

N/A

N/A

Average of implied values (p/share)

276

Source: Refinitiv, Edison Investment Research (Augean). Note: Prices as 25 February 2020.

Exhibit 7: Financial summary

£'000

2018

2019

2020e

2021e

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

79,749

107,137

120,772

131,530

141,411

151,590

Cost of Sales

(67,269)

(73,669)

(85,688)

(92,637)

(97,558)

(103,831)

Gross Profit

12,480

33,468

35,084

38,893

43,852

47,759

EBITDA

 

 

18,944

28,848

33,189

37,228

42,150

46,008

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

12,244

19,948

24,154

27,621

32,524

36,382

Intangible Amortisation

(58)

(39)

0

0

0

0

Exceptionals

(322)

(26,843)

0

0

0

0

Share Based Payments

(523)

(7,693)

0

0

0

0

Operating Profit

11,341

(14,627)

24,154

27,621

32,524

36,382

Associated company

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Net Interest

(748)

(697)

(1,309)

(1,209)

(1,183)

(1,151)

Profit Before Tax (norm)

 

 

11,496

19,251

22,845

26,412

31,342

35,230

Profit Before Tax (IFRS)

 

 

10,593

(15,324)

22,845

26,412

31,342

35,230

Tax

(2,043)

2,568

(4,112)

(4,754)

(5,641)

(6,341)

Profit After Tax (norm)

9,453

21,819

18,733

21,658

25,700

28,889

Profit After Tax (IFRS)

8,550

(12,756)

18,733

21,658

25,700

28,889

Average Number of Shares Outstanding (m)

103.4

104.0

104.8

104.8

104.8

104.8

EPS - normalised (p)

 

 

9.14

20.98

17.88

20.67

24.53

27.57

EPS - normalised and fully diluted (p)

 

9.14

20.98

17.88

20.67

24.53

27.57

EPS - (IFRS) (p)

 

 

9.61

(12.26)

17.88

20.67

24.53

27.57

Dividend per share (p)

0.00

0.00

0.00

0.00

0.00

0.00

Gross Margin (%)

15.6

31.2

29.0

29.6

31.0

31.5

EBITDA Margin (%)

23.8

26.9

27.5

28.3

29.8

30.4

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

15.4

18.6

20.0

21.0

23.0

24.0

BALANCE SHEET

Fixed Assets

 

 

61,977

66,977

63,892

59,136

54,510

49,883

Intangible Assets

19,823

24,318

24,318

24,318

24,318

24,318

Tangible Assets

40,373

38,309

35,074

30,468

25,842

21,215

Investments & Other

1,781

4,350

4,500

4,350

4,350

4,350

Current Assets

 

 

33,371

62,090

79,263

106,493

136,712

172,247

Stocks

277

302

338

362

378

400

Debtors

18,628

40,200

46,000

51,000

51,000

54,000

Cash

11,162

21,588

32,925

55,131

85,335

117,847

Other

3,304

0

0

0

0

0

Current Liabilities

 

 

(23,585)

(40,017)

(37,652)

(40,248)

(41,921)

(44,270)

Creditors

(23,585)

(33,350)

(37,652)

(40,248)

(41,921)

(44,270)

Short term borrowings

0

(6,667)

0

0

0

0

Long Term Liabilities

 

 

(11,463)

(39,469)

(36,085)

(35,805)

(35,525)

(35,245)

Long term borrowings

(2,922)

(28,123)

(28,123)

(28,123)

(28,123)

(28,123)

Other long term liabilities

(8,541)

(11,346)

(7,962)

(7,682)

(7,402)

(7,122)

Net Assets

 

 

60,300

49,581

69,418

89,576

113,776

142,616

CASH FLOW

Operating Cash Flow

 

 

17,413

(16,215)

30,725

34,670

43,528

45,055

Net Interest

(360)

(597)

(1,309)

(1,209)

(1,183)

(1,151)

Tax

(1,063)

(820)

(4,112)

(4,754)

(5,641)

(6,341)

Capex

(3,413)

(5,841)

(5,800)

(5,000)

(5,000)

(5,000)

Acquisitions/disposals

6,212

3,350

0

0

0

0

Financing

250

(1,319)

(1,500)

(1,500)

(1,500)

(49)

Dividends

0

0

0

0

0

0

Net Cash Flow

19,039

(21,442)

18,004

22,206

30,203

32,513

Opening net debt/(cash)

 

 

10,799

(8,240)

13,202

(4,802)

(27,008)

(57,212)

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

(8,240)

13,202

(4,802)

(27,008)

(57,212)

(89,724)

Source: Augean accounts, Edison Investment Research


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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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The last several months were eventful for VolitionRx. The publication of the first ever proof-of-concept data in haematological cancers was the R&D highlight in Q419. On the corporate front, the company has acquired Octamer, now an in-house manufacturer of a key assay component, and is rapidly developing its veterinary subsidiary in the US. From a platform perspective, VolitionRx is moving away from traditional ELISA plates to a new format immunoassay based on magnetic particles. This is expected to improve the analytical performance of VolitionRx’s Nu.Q assays in the clinical studies. Our valuation stays at $223m or $5.42/share.

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