Strong all round
Augean (LONDON:AUG) reported a strong set of FY14 results and provided an impressive organic profit growth outlook in excess of 10% for FY15. Clearly, the strategy introduced by CEO Stewart Davies is paying dividends and we expect it to continue to deliver improvements to ROCE. In our view, the current share price reflects the value of assets today with no value for growth.
Robust FY results
Augean reported its FY14 results with revenue of £55.0m (vs Edison forecast of £51.5m, +26% y-o-y), clean operating profit of £6.15m (Edison at £6.05m, +20% y-o-y) and clean PBT of £5.39m (Edison at £5.38m, +22% y-o-y). The company also reported DPS of 0.50p/share (Edison at 0.45p/share, +43% y-o-y) and group net debt of £5.7m (Edison at £5.7m). ROCE for FY14 increased to 10.7% vs 8.9% at FY13 and 10.1% at H114. All of Augean’s divisions reported y-o-y growth both at the revenue line and operating profit level. Augean also announced the acquisition of a 19% minority share in Augean North Sea Services (ANSS) business for £1.05m. This transaction implies 3.7x EV/EBITDA (FY14) and 4.4x based on our FY15 forecast for ANSS, which in our view was done at an attractive price.
Strong outlook
Augean expects organic group profit growth in excess of 10% in FY15, with growth from Energy & Construction, Radioactive Waste Services, Industry & Infrastructure and Integrated Services fully offsetting any weakness from ANSS. Despite a strong start to FY15, Augean continues to be cautious on the outlook of the ANSS business (especially in H215). In our view, the low operational leverage of ANSS, (74% of FY14 cost base is variable), should provide sufficient flexibility to reduce the impact of a fall in volumes, should it materialise.
Valuation: Current share price implies no growth
We have increased our FY15 and FY16 operating profit by 3% and 1% respectively and our EPS by 7.5% for FY15 and 3% for FY16. Based on our range of valuation approaches, including DCF, ROCE and peer multiples, we derive a value of 49-73p/share. Our ROCE methodology showing the book value of the asset (assuming no growth or value creation) is at the bottom end of this range and our DCF valuation using a more bullish 2% terminal growth rate is at the top of the range. In our view, the current share price is reflecting the value of the assets today with no growth. Given the double-digit profit growth outlook for FY15 provided by the company, we believe there is further upside to the shares.