Share tips: Turn rubbish into gold with this recycler
By
Paul Hill Jan 20, 2012
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When it comes to recycling, the Dutch are world leaders. As a flattish country with much land below sea level, there’s little space to build landfills, so the Dutch separate waste at source, reclaiming and recycling materials and minimising waste.
Britain has a lot of room to catch up. We are aiming to double our recycling activities from today’s 40% levels to nearer the 80% achieved on the continent. One stick being wielded to drive this change is landfill tax.
Each year this rises by £8 a tonne and is set to hit £80 a tonne by April 2015. Some of this money, along with private sector cash, is being put towards the construction of £10bn worth of new private finance initiative (PFI) infrastructure.
Shanks is one of Europe’s most advanced waste recyclers, making 67% of profits from the Netherlands, 18% from Belgium and the rest from Britain (9%) and Canada (6%). It plans to take its expertise from Benelux and use it to compete in the faster-growing UK market, where it hopes nearly to treble earnings over the next three to five years.
The board is investing in recycling, waste-to-energy, composting and anaerobic digestion plants. These will allow Shanks to turn household rubbish into solid fuels, and food and garden waste into biogas, soil conditioners and liquid fertiliser.
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In the six months ending in September, revenues rose by 14% to £988m. Adjusted EBITA rose to £28.1m and the dividend grew by 10%. The previously loss-making PFI unit achieved margins of 9%. The unit is also down to the last two bidders for seven further deals, which could add another 1.1 million tonnes of waste a year to its volumes. Recycling prices are holding up and its business clean-up activities on contaminated land in Holland is relatively buoyant.
Shanks (LSE: SKS), rated a BUY by RBS
The City expects turnover and underlying earnings per share (EPS) of £772m and 7.6p for the year ending March 2012, rising to £819m and 8.5p. I rate Shanks on an eight times EBITDA (EBITA excluding depreciation) multiple. Adjusting for £166m net debt and an £11m pension deficit, that gives a value of around 160p a share.
British investors should watch out for foreign-exchange issues, particularly if Benelux is sucked into the European debt vortex. Corporations produce less waste when times are hard, so a recession could be bad news. But there’s no sign of volumes dropping yet. With the tailwind from tightening environmental laws, Shanks should continue to prosper. Royal Bank of Scotland has a price target of 152p. The next trading statement is out in February.
Rating: BUY at 98p (market cap £389m)
• Update: Robert Wiseman (LSE: RWD) - Müller Dairy has agreed to buy Robert Wiseman for 390p a share in cash, plus an interim dividend of 5.75p, giving a total of 395.75p. That’s a 23% gain on our initial buy tip of 322p (from May 2011). Müller already has irrevocable undertakings relating to 57.5% of the capital. There is always an outside chance a third party may submit a competing bid, although it seems unlikely. So HOLD for now.
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.
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