For a company that reported double-digit EBITDA and operating cash flow growth for FY16, Augean (LON:AUG) continues to confound our analysis by trading on a low P/E multiple and well below our fundamental fair value. Given its excellent market position and sustainable competitive advantage through ownership of scarce hazardous landfill assets, we believe the stock should trade well above current levels. Granted, the company had one or two negative items at the full year, most notably the East Kent impairment, but cash conversion at 95% allowing for growth capex and a 50% increase in dividends is an attractive earnings story which is supported by our discounted cash flow valuation of 80p/share.
FY16 good overall, minimal changes in our forecasts
Augean’s overall performance in FY16 was very strong although the market may have been disappointed there was no positive forward guidance issued by management. 16% growth in clean PBT for FY16a was driven by high levels of growth in three out of its five business units. Augean’s largest single unit by a margin, Energy and Construction (E&C), reported a stellar FY16 with a 28% operating profit increase underpinned by 48% volume growth in its Air Pollution Control Revenues (APCR) business. Our forecasts have a reduction in E&C for FY17e which is sensible given the cyclical nature of the construction industry but we would highlight this segment could well surprise on the upside in FY17. Overall, our FY18e earnings are virtually unchanged and our FY17e clean PBT is down 7.5% but we would draw attention to Augean’s track record in strong cash conversion and its over 50% increase in dividend announced at FY16.
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