Managing market challenges
In the face of difficult markets, Shanks Group (SKS.LSE) continues to manage its business actively, reducing costs, exiting underperforming assets, conserving cash and investing in core growth areas. In the short term we have trimmed our normalised PBT forecasts for FY14 and FY15 to reflect continuing market headwinds; however, consistent implementation of Shanks’ strategic plan should enable it to position itself effectively for more benign markets and establish a platform for growth.
Managing market trends
Shanks issued a pre-close trading update ahead of its FY14 results, which will be released on 15 May. Despite facing challenging conditions in the Benelux Solid Waste and EU Organics markets – conditions that are expected to persist for the duration of this year – Shanks has continued to trade robustly and expects to deliver a full-year result broadly in line with expectations. In the face of market challenges, it has continued to focus on its strategic plan to reduce costs (it expects to meet its target for the year), investing in growth areas such as Hazardous Waste and UK Municipal conditions, and exiting underperforming businesses. Shanks also continues to focus on cash management and expects net debt to be at least in line with market expectations.
Profit forecasts trimmed
In light of the continuing market challenges we have taken this opportunity to trim our forecast for normalised PBT for FY14 and FY15 to £30m, versus our previous forecasts of £31m and £32m respectively. We note Shanks’ comments on the net debt position and a core net debt figure of £170-180m for FY14 compares favourably to the market range for FY14e core net debt (excluding non-recourse PFI-related debt) of c £180-195m (Edison £194m).
Valuation: Upside value remains
Despite modest reductions to our near-term forecasts we continue to see upside in the shares. We have updated our valuation analysis to reflect market and peer group movements and also consider DCF, bid multiples and sum-of-the-parts analysis to provide an indicative valuation range. The average of our approaches indicates a valuation for Shanks of c 120p/share. Our DCF points to a valuation of over 130p/share.
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