Companies: AUG   

Guided by industry heavyweights David Williams and John Huntington, Augean is the UK's leader in hazardous waste disposal. With a strong legislative wind behind it, it is sailing in a fast-growing market.

A recent profits alert did lead to a drop in the share price. But since that was down to nothing more serious than timing problems, the shares look worth picking up.

Wheeler-dealer Williams is Augean's non-executive chairman, while Huntington is its chief executive. Both were key figures at Waste Recycling, where, as chairman, Williams helped float the business and then oversaw a rise in valuation from £8 million to £550 million in seven years. Today he is best known as the energetic front man of Marwyn Capital, which has floated a flurry of shells sporting well-regarded management teams onto AIM.

Augean, launched as an acquisition vehicle last September, is named after the Augean stables of Greek mythology, that were cleaned out efficiently by Heracles.

In November last year, it raised a bumper £100 million through an institutional placing at 180p a share to fund the £80 million acquisition of Peterborough-based Atlantic (now known as Augean South) and Middlesbrough-based Zero, bought for £26 million and re-named Augean North.

Williams says the group's growth driver is the EU Landfill Directive, which became law here last summer. But it has also been helped by a more recent development; waste previously classified as ‘special’ – including everyday items such as fluorescent light bulbs – has been reclassified as ‘hazardous’, and Augean is one of the few ventures allowed to process such materials.

As Numis analyst Francesca Raleigh explains: ‘We are catching up with the EU on this and the market is just getting bigger and bigger. There are very few companies that can handle hazardous waste.’ This shortage of dedicated sites able to accept the five million tonnes of hazardous waste produced per year means Augean could clean up. And the dearth of capacity twinned with rising demand is sending prices skywards.

The one blot on the copybook is a recent profit warning. Issued in a pre-close period update for the half-year to end-June, the alert prompted a 50 per cent downgrade to 2005 forecasts from the house broker.

Two factors did the damage. Although prices exceeded expectations, volumes from building and construction disappointed. In Williams' opinion, that was down to a lack of awareness of the new legislation – which, in any event, was not being policed. He remains convinced that pent-up volumes are heading Augean's way.

The second factor was the Environment Agency’s failure to grant permits for two 'monocells', basically ring-fenced spaces able to accept particular wastes, because of a backlog of applications. The cool-headed Williams admits the monocells were budgeted as an important profit source, but he is certain permits are on their way, auguring well for the future.

Raleigh now forecasts profits of £8 million, rather than £16.4 million, for the current year, with earnings pared to 7.4p (15.2p). For 2006, the £19.5 million originally mooted has been cut to £16 million, dragging earnings estimates back from 17.8p to 14.6p. That values Augean at 22.8 times forecast earnings for 2005, but only 11.6 times those forecast for next year.

Augean has a strong management team, the balance sheet firepower to do deals and a sound business model. Both Atlantic and Zero are already profitable and generating cash. 'We remain confident about the model and the potential to create a large, profitable, cash-generative force in the UK hazardous waste market,' states Raleigh.

It is hard to disagree. It is also worth noting that Williams bought 100,000 shares at 148p following the warning. A speculative buy ahead of the interim figures due in September.

Augean	AIM	£71.06m	108.50p	7.00p
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