Despite the challenging trading conditions affecting some of the divisions, the portfolio approach allowed all the group financial metrics to show double-digit growth. Good cash generation gives the group strategic options and has allowed a positive dividend surprise (+30%) reflecting the board’s confidence in Augean’s long-term prospects.
Having put a revised strategy in place in 2014, Augean’s FY15 results were further evidence that the move to ‘market facing’ divisions has allowed the group to continue its positive momentum, with four divisions out of five showing progress despite the difficult background. All the financial KPIs were positive and we were encouraged in particular by the improvement in ROCE to 11.4%. With an increasingly strong balance sheet and significant financial firepower, the focus remains on creating long-term shareholder value, whether organically or via selective acquisitions.
The group remains confident it can make further progress in 2016 despite highlighting its concerns over the continued weakness in Oil and Gas exploration and delays in nuclear decommissioning. This reflects management’s revised strategy of building sustainable market positions and broader, more resilient longterm income streams with Tier 1 contracts.
The recent price weakness leaves the shares at a discount to our valuation range (49-77p) and in our view appears overdone, reflecting the uncertainty caused by the weak oil price and customer response to the updated Landfill Tax guidance on landfill volumes, rather than the strong underlying progress and prospects. With current trading in line with market expectations we are maintaining our 2016 forecasts, which anticipate another year of strong PBT and EPS growth. A FY16 P/E of 8.7x and an EV/EBITDA under 4.0x seems anomalous given Augean’s strategic position and growth prospects. An increasingly healthy balance sheet has allowed a significant increase in the dividend (+30%) and with financial firepower of £10-25m available, management continues to review a range of acquisition opportunities which should further enhance returns. A successful conclusion to this selective and patient approach is likely to be well received by shareholders.