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.
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 drillingrelated 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.
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.
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 sectorbased 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.
