Augean’s high margins and earnings growth offer attractive returns for equity holders in an uncertain macroeconomic environment. Bolstered by the accretive Colt acquisition and benefiting from new contract wins, we increase our FY17 group EBITDA forecast for Augean by 16%. Given its specialist service offering, Augean is highly profitable and typically carries a low level of debt, so continually has to weigh capital allocation versus shareholder returns. We were therefore pleased that management paid a very sensible EV/EBITDA multiple of 6.6x for Colt, a Hull-based specialist waste services provider.
Since we last published on Augean in April, economic uncertainty in the UK has risen with the Brexit vote while difficult conditions in the oil and gas industry have continued. We therefore revisited our Augean investment case and updated our forecasts for the Colt acquisition, the IMS on 21 July and new contract wins. We found that due to its resilient margins underpinned by high regulatory barriers to entry, its strong management team and recent earnings accretion from acquisitions, Augean offers a compelling and resilient returns profile for investors.
We have updated our forecasts to reflect the Colt acquisition plus the addition of new contracts in the Energy and Construction business. We have also taken into account other smaller items, such as updates from the recent IMS, which do not move our forecasts significantly. The net effect of all of our changes is increased EBITDA and EPS across our earnings horizon. Our FY17 EBITDA forecast has moved from £14.2m to £16.5m. Meanwhile, positive underlying cash flow underpins a sound balance sheet.
We have increased our fair value range from 49-77p to 60-90p. We use a mixture of DCF, ROCE over WACC and a peer-based comparison to arrive at our fair value range. Trading on respective FY17e EV/EBITDA and P/E multiples of 3.4x and 6.8x, we believe Augean is materially undervalued based on its high degree of profitability and sector-beating returns profile.
