Belgian landfill ban is a drag on Shanks

Belgian landfill ban is a drag on Shanks

By Stanley Pignal

Published: May 30 2008 03:02 | Last updated: May 30 2008 03:02

An unlikely blend of Belgian legislation and finance charges on government contracts held back profits at Shanks, the waste disposal company that has operations in Britain and Benelux.

But the group, announcing results for the year to the end of March, said sales had risen 11 per cent to £564m ($1.1bn) and underlying profits – excluding amortisation and exceptional items – were up more than 10 per cent.

That came in spite of a falling contribution from Shanks’s Belgian landfill business, where volumes are in long-term decline as the government looks to ban municipal biodegradable waste from going to landfill.

Tom Drury, chief executive, said growth this year in the UK and the Netherlands would more than offset losses in Belgium.

The regulatory move towards sustainable waste management will benefit the UK business, which sold its landfill business in 2004 and hopes its municipal treatment facilities will grow through the use of private finance initiative contracts.

Accounting rules on those PFI deals led to a large non-cash adjustment to profits that, along with higher interest charges following a string of acquisitions, reduced pre-tax profits to £41.3m (£46.1m).

The final dividend of 4.2p (4p) brings the total to 6.2p (5.9p), to be paid from earnings per share of 12p (13.3p). The shares fell 9½p to 245¾p.

FT Comment

• Waste management companies look great on paper – regulation on their side, long-term contracts, stable cash flows – but those that have been listed have never quite lived up to expectations. Investors have poured money in, but the competitive pressures and complexity of the business mean most have been scalded, if not burnt. Shanks is now the only listed company in the field, and its results, though fine, are not spectacular. That makes the 17 times price/earnings ratio look outlandish at first, though there are a few hidden gems in the business that are not yielding earnings yet. A host of long-term PFI contracts could be worth almost £100m, or about 35p a share. Looking at it from a private equity perspective – an exercise traditionally worth doing in this sector – the enterprise value/ebitda is 8.2 times. That is at the low end of recent buy-outs in the sector, though those deal values have included a healthy premium. Given the unlikelihood of any more buy-outs because of treacherous market conditions, the shares look more than fully priced.