Augean has reorganised its business and now enjoys a strong competitive position in its key markets, allowing it to capture underlying market growth and significantly improve profitability. The H119 results and recent trading update suggest this trend is set to continue. Augean’s market rating, even allowing for the outstanding tax liability with HMRC, appears very modest for a company with significant growth potential.
Augean reported strong growth in H119 (adjusted EBITDA +71% to £14.2m) and the recent trading update (16 October) confirmed the positive momentum. Augean pointed to a 20% increase in landfill volumes and a 20% increase in landfill pricing, alongside strong performances from North Sea Services and the radioactive waste business. Management stated that adjusted PBT would be ‘materially’ ahead of prevailing market consensus prior to the release of the update (£16.5m).
Since 2017 Augean has implemented a successful turnaround of the business reducing costs by c £6m, selling underperforming businesses and increasing prices and volumes in all its core operations. These actions have had a beneficial effect on profitability, with reported PBT increasing from under £5m in FY17 to over £18m expected in FY19. Augean is now well positioned in its three key markets of municipal ash, soil and North Sea Services and we expect these markets will be the dominant contributors to future profit growth. We note that in ash, Augean has already signed contracts with municipal incinerators that are due to start operation shortly and which Augean believes could add c £12m to PBT over the next two to three years. The dispute with HMRC over landfill taxes continues but Augean is now in a financial position, should it choose to do so (with some borrowing), to pay off the total liability, which we believe will be in the region of £53m when all assessments and penalties have been received. Payment of the HMRC liability would not only draw a line under the dispute, it would prevent further accrual of unpaid interest and allow the cost of borrowing to be offset against taxation.
Since the end of 2017 the shares have performed strongly but we believe additional share price appreciation is possible in view of the potential clarification of the HMRC liability and Augean’s future growth prospects. Our analysis, based on a range of valuation approaches, indicates a potential valuation for Augean in the range of 175p to 225p per share.