A strong first-half performance gives confidence that the group can deliver the target of double-digit growth in profit before tax in 2015. The portfolio approach was clearly beneficial and led to an improvement in ROCE and strong cash flow. This gives flexibility going forward to supplement organic growth with acquisitions and to enhance potential returns.
While group revenues and profitability were both up over 20%, this masked a mixed divisional performance but again underlines the benefits from this structure. Given the current oil price weakness, concerns over the impact on ANSS proved misplaced. The division more than doubled profitability, utilising its flexible cost base and is now likely to exceed initial management expectations. This strong performance reflects both the strength of its service offering and relationship with tier one customers. Current levels of drilling activity suggest H215 and 2016 are likely to be tougher, but three new contract wins give confidence for the mediumterm outlook.
We believe the interim results clearly demonstrate that the strategy put in place by the new management team is working, with the group showing good progress despite the challenges faced by a couple of the business units. In H115, strong cash flow led to a reduction in debt from £5.7m to £3.0m (after spending £1.1m on ANSS’s minority) and an improvement in ROCE from 10.1% to 11.7%. The group now has significant financial flexibility and firepower to fund organic development of its landfill capacity and bolt-on acquisitions that strengthen its service offering and are likely to be earnings enhancing.
Following recent price weakness, the shares are now on a prospective P/E of 11.7x and an EV/EBITDA of less than 6x. We believe this is not a true reflection of the strategic position or value of its regulated asset portfolio of specialist landfill and hazardous waste services and reiterate our valuation range of 49-77p per share. In addition, the improving ROCE shows the revised strategy is working and with a much reduced debt position, we have confidence that the management team has options to enhance future returns and growth potential, by allocating capital either internally to support contract growth or via selective bolt-on acquisitions