You could clean up with Augean and hazardous waste

Richard Rivlin
Last Updated: 9:27pm BST 23/08/2008

Paul Blackler runs Augean, a business that deals with hazardous waste, helping the likes of AstraZeneca and Morrisons to get rid of their rubbish. He has been knee-deep in the industry for 16 years and now heads one of only two listed waste businesses in the UK.
There are three categories of waste - inert, non-hazardous and hazardous - and Augean is focused exclusively on dealing with the hazardous stuff. It owns and operates several sites from Paisley down to Avonmouth, focusing on recycling, treating and testing the waste.
Blackler says: "People have this vision of what this type of waste is. But it does not have to glow green and ooze down the corridor to be hazardous." This category includes contaminated soil, asbestos and chemical waste from industrial processing. Domestic examples of hazardous waste include fluorescent tubes, batteries and old fridges.

Augean is an unusual company. Investors are unsure whether to classify it as a business services group earning fees for the work it does or as an infrastructure group that owns several industrial sites to process the waste.
Combining the two makes it not easily understood and unloved by the market. But Blackler thinks it is only a matter of time before the stock is re-rated, as investors succumb to his infectious enthusiasm for waste.
Shares are currently 67.5p, valuing the company at £44.21m. The business has debt of £20.17m, but is comfortably operating within its banking facilities of £40m. Augean is highly cash-generative so could reduce the debt reasonably quickly, if it were not investing in new plants and products.
It is forecasting sales of £35m and profits of £4m in 2008. Shares are not cheap but then this is an asset-rich business with high barriers to entry. For instance, the Environment Agency regulates how hazardous waste is processed and industry practitioners need vetting and permits to operate.
Augean has 10 of these permits, which is a relatively small number. But they account for 50 per cent of the permitted capacity in the UK for processing hazardous waste. Its major competitors in this field are Veolia Environmental Services and SITA UK, which are both huge businesses.
Blackler does not wait for the next question. He says: "Of course they are major businesses and could pick us up, but they are focused on much wider activities than Augean is. We focus exclusively on the hazardous waste sub-sector."
One factor that prospective investors should bear in mind before putting their hands into their pockets is how few shares are owned by the current management team. Blackler was appointed as chief executive last December after the abrupt resignation of his predecessor. The management team he runs owns a tiny number of shares between them and this is something he unsurprisingly wants to change in future.
If the next few months go well, he will knock on the door of the non-executive chairman in January to re-negotiate the options scheme for himself and the company's senior management.
Blackler says: "If I deliver, I will want to get the fruits of my labour. This is a long-term infrastructure development business, but I think it is important that we are able to demonstrate progress year-on-year."
In the onger term, this business is unlikely to remain as a small Aim-listed company as it looks more likely to be sold. It does not take a corporate finance guru to develop an interesting shortlist of bidders. There are Augean's two rivals, or it could be taken private with backing from a private equity or infrastructure fund that likes the quality of the assets that underpin the business.
Then there is One51, the Irish investment company that has built a 26.89 per cent stake in Augean. It already owns 21 environmental services businesses, so who would bet against Augean becoming the next one?
Richard Rivlin is managing director of Bladonmore www.bladonmore.com