Companies: AUG    CSLT    LTC    PKW    SPGH    TEG   

During 2004 and 2005, the UK implemented the EU Landfill Directive, the revised EU Hazardous Waste List and other changes to hazardous waste management. That precipitated significant changes that mean considerably fewer landfills are being authorised to accept hazardous waste, as well as changes to the classification of what constitutes hazardous waste, broadening the scope of the problem. Concern for the environment is driving ever-more stringent landfill legislation and there are several ways for investors to gain exposure to this space.

Earth clean-up drives earnings
Hazardous waste business Augean floated on AIM in 2004 to capitalise on the aforementioned EU drive. Through acquisitions, the group has a number of licensed facilities able to handle 2.4 million tonnes of waste (including hazardous) a year and after initial teething problems (internal issues and slower than expected market volumes), business appears to be booming.

‘Adjusted’ 2006 earnings per share grew 35 per cent to 5.6p and a strong first half of 2007 was recently flagged up to the market. The landfill division enjoyed a rise in hazardous waste volumes from 117,000 to 125,000 tonnes. With first-half profits expected to top £2 million – the business lost money at the interim in 2006 – and debt encouragingly low at £9 million due to strong cash generation, Augean’s shares, lower at 117p though not cheap on 21 times historic earnings, offer good long-term potential.

Also planning profits from the drive to clarify what can and cannot be dumped in the ground are two businesses that have teamed up through a 50/50 joint venture (JV). Through its ‘green services’ division, Glendale, support services group Parkwood is collaborating with TEG Group, the AIM business behind composting technology that treats animal by-product (ABP) waste. The TEG Silo Cage system treats this waste through a natural process that represents an economically viable alternative to landfill and produces organic fertiliser. Potential customers range from local authorities and waste management companies to food processors.

Increasingly stringent EU legislation regulating the treatment and disposal of organic waste will drive the composting market – statutory targets for the diversion of waste from landfill increases annually through to 2020 – and burgeoning demand from the private sector driven by ABP legislation further underpins prospects. Specifically, rising landfill taxes and heavy fines for councils that exceed waste quotas should drive demand.

Set up to bid for Local Authority waste contracts and private-sector deals, the JV’s plants will turn organic waste into commercial compost that can be sold to Glendale, which provides amenity horticulture and grass cutting services for pitches and parks as well as managing golf courses. Sales into the wider horticultural market should also fill the coffers of the JV, backed up by Glendale’s knowledge of the horticultural product market.

Of the two businesses, Parkwood, which also boasts a successful leisure division, represents a far less risky investment than TEG, having delivered 23 per cent pre-tax profits growth to £2.53 million in 2006. On earnings increased 28 per cent to 8.8p, dividends increased to 2.6p (2.3p), placing the shares on a historic earnings multiple of less than 12 times with solid yield appeal.

TEG has intriguing long-term prospects with a strong pipeline of projects, although its price was recently lowered by a significant contract delay, suggesting revenues could be lumpy and share price progress volatile. Nevertheless, sales soared 640 per cent to £3.6 million last year, though with losses having narrowed to a still-not-insignificant £1.5 million, the shares are speculative fare for now.

Cosalt’s marine safety mission
Legislative decrees handed down by the International Maritime Organization (IMO) underpin earnings at turnaround counter Cosalt. Restructuring and acquiring under chief executive Per Jonsson, this EU market leader in marine safety services operates a network of marine safety businesses based in the ports of Rotterdam, Antwerp, Hamburg and Barcelona, one of Europe’s fastest-growing cargo and cruise ship ports.

‘The IMO enacts legislation across the globe and politicians can’t interfere with its implementations,’ explains Jonsson, who believes Cosalt will continue to be a beneficiary of the worldwide marine safety legislation that came into effect in July ‘06, requiring all merchant ship crewmembers be equipped with immersion suits.
‘Previously, it was just the captain and his best friend,’ says Jonsson, pointing out Cosalt shipped more than 60,000 suits globally during the last financial year. ‘This year it will come down to less than 10,000, but that’s still a bigger number than the old days and, what’s more, immersion suits have to be inspected every three years, which we are able to do; hence our decision to grow our global footprint of service stations in ports.’ Regulations have also come into force that decree that yearly inspections and services of lifeboats have to be carried out by certified third parties such as Cosalt, which is expanding its services into the lifeboat sector.

Following a swing into the black last year, interims to April demonstrated dramatic profits improvement, though slower than expected recovery within the ‘non-core’ holiday homes business prompted downgrades. For October ‘07, pre-tax profits of £3.6 million look deliverable from £138 million sales, ahead of £5 million profits the following year. Based on forecast earnings of 17.2p and 23.1p, the shares trade on immodest forward multiples of 22.3 and 16.6 times. However, non-core disposals could bring alluring sale proceeds and further legislative creep should drive profit progression. Backers of the business, intent on delivering growth rather than income for the foreseeable future, include David Ross (of Carphone Warehouse fame) and Hanover Investors, which backs undervalued recovery situations.

Latchways heightened appeal
Latchways designs, makes and sells fall-arrest safety systems protecting people working at height. Sold globally through a network of trained installers, the systems protect grafters at work on everything from buildings to aircraft wings, and the ‘fall-protection’ market is gaining increased awareness around the world as legislators recognise the need for safe working practices.

Increased emphasis on health and safety legislation throughout the European Union has been one of the key drivers of the fall-protection business over the past decade, while workers in all the major industrial nations are protected by safety-at-height legislation. More recently, the UK and certain other EU countries interpreted existing rules into specific fall-protection legislation, further boosting already strong demand.

2005’s Working at Height Regulations (WAHR) extended previous provisions beyond ‘construction’ work to a wider range of other sectors and activities, such as window cleaning, container-top work in docks, working on the back of a lorry and erecting bill posters. Now, the regulations apply to all work at height where there is a risk of a fall that could cause injury.

Though a red-tape headache for employers and building managers, such drivers have translated into emphatic financials for strongly cash-generative Latchways, which has a growing City fan club attracted to its excellent conversion rate of earnings to cash and superb dividend track record. For the year to March, profits grew 26 per cent to £7.8 million and a 21 per cent increase in the final dividend to 11.84p was declared, which, together with a 30p special dividend, took the annual total to a bumper 47.76p. The special dividend, returning £3.3 million to shareholders, reflected Latchway’s ability to grow organically and acquisitively without recourse to shareholders. Trading on a forward p/e of 18.4, relatively undemanding given the record of the business and its terrific cash flow, the shares should be on every growth company investor’s radar.

Superglass’ solid earnings appeal
Doing its bit to improve air quality by reducing levels of greenhouse gas emissions while conserving energy is Stirling-based Superglass, the maker and supplier of glass wool thermal insulation products recently brought to market by Brewin Dolphin.

Joining the Official List with a £105 million market price tag following a placing at 180p, the company is the second largest supplier of glass wool insulation in the UK and plans to profit from rising UK and European demand for insulation products. The glass wool quilt rolls and slabs it supplies are mainly used in residential, agricultural and industrial applications as well as for the insulation of cavity walls in new buildings.

Significantly, the market for glass wool insulation has been in a growth phase since 2002, driven by a combination of Government initiatives to slash carbon dioxide emissions and conserve energy by encouraging domestic insulation through its Energy Efficiency Commitment. Changes to UK Building Regulations, along with the growing awareness of environmental issues, continue to drive the market for such products, which are supplied to distributors, contractors and builders merchants. With the market forecast to grow by 37 per cent between 2006 and 2010, Superglass occupies a sweet spot indeed.

Its recent financial progress merits mention, with turnover and profits having increased consistently over the past ten years. The company has highly cash-generative characteristics, which should underpin the board’s stated progressive dividend policy. Last year, an EBITA of £10.1 million was achieved from a top line £42 million and the shares, which have risen from the issue price to 212p, have solid appeal for a quoted newcomer.