No immediate resolution to the dispute with HMRC over landfill taxes is expected and, in the absence of clarity as to the timing and scale of any potential payments, Augean's (LON:AUG) management continues to take firm action to improve the strength of the business (disposals/cost control). The difference in market capitalisation between a share price of 25p and our DCF valuation of c 70p/share equates to c £47m and compares to the total of HMRC assessments received so far of £12m (five assessments).
A tough year in FY17
While revenue rose 11% in FY17, to £84.7m (Edison FY17e £83.2m), operating profit fell to £6.4m (FY16: £7.8m). The main reasons for the decline were increased costs (put in place in H216), issues with a legacy contract at Colt, lower volumes in the soil market and exceptional costs of £8.6m (ongoing restructuring costs and an impairment charge to the carrying value of Colt of £6.3m). Given the continuing uncertainty relating to its landfill tax dispute with HMRC, Augean will not pay a dividend for FY17 (reducing cash outflow by c £1m in FY18). Capex increased to £8.5m (FY16: £8.4m). Nonetheless, end-December net debt was £10.8m, significantly below our forecast of £13.5m, and has fallen further to £8.9m (at 19 March). The lower debt figure was the result of stronger than anticipated operating cash flow (better working capital movements + lower tax and interest payments).
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