Augean’s (AUG) dispute with HMRC over landfill taxes and tough trading conditions in its key markets creates significant uncertainty. The company has taken decisive steps to reshape its management team and reduce its cost base, in order to provide Augean with a stronger and more dynamic base from which to grow post a resolution to the dispute.
Stewart Davies has resigned from his position as CEO, by mutual consent, and is to be replaced by Jim Meredith, who will expand his role as non-executive chairman to become executive chairman. We expect Mr Meredith (acquired 1m shares in October 2017), who has significant experience in the waste industry, including as CEO, to focus his attention on finding a resolution to the dispute with HMRC and maximising the cash return from the business. Augean cautioned that the dispute with HMRC is unlikely to be resolved imminently. The ranks of the nonexecutive directors have also been strengthened with appointment of Christopher Mills and Roger McDowell. The latter was formerly a board member of Augean (2004-15) and served as interim CEO (2006-7) and interim chairman (2010-12).
AUG warned that FY17 PBT will below the FY16 level and that FY18 profits will also be below previous expectations (Edison FY18e was £8.3m), mainly the result of continuing weakness in the soil market (volumes and price) and legacy costs associated with Colt. To counter the tough trading, AUG announced additional cost reductions of £1.7m (total target of £3m). To facilitate the cost reduction, AUG will incur an additional one-off exceptional charge of £0.9m (£0.7m announced at H117). The cost savings are expected to yield a full year benefit in FY18.
We have updated our forecasts to reflect recent announcements and the H1 results. We now expect FY17 EBITDA of £11.9m (previously £14.8m) and PBT of £6.0m (£7.3m). For FY18, we forecast EBITDA of £14.4m (£16.3m) and PBT of £8.1m (£8.3m). For now our DPS forecasts remain unchanged, but AUG’s ability to pay will need to be assessed in light of the scale of any settlement with HMRC. We forecast lower capex and have reduced our tax rate to 19.5%. Our DCF valuation, which does not include the cost of settling with HMRC, remains at 67p/share. The recent share price weakness now means there is a significant difference between our DCF valuation and the current share price (equivalent to c £34m) reflecting, we believe, the uncertainty surrounding the scale of the potential payment to HMRC.