Shanks Group Global commodity crisis offsetting progress Trading statement Industrial support services The trading statement on 3 February highlighted further progress in the Commercial division. However, this was offset by impacts from the global commodity crisis, leaving results likely to be slightly below expectations, and we are lowering our 2016 EPS forecasts by 7%. With the disposal of the Wakefield assets the first stage in value realisation from the PFI portfolio and the shares drifting below our valuation range (unchanged at 106-130p/share), a yield over 4% should provide support before more tangible evidence from the cost management programmes shows in results. 5 February 2016 Price 78.3p Market cap 312m 1.35/ Net debt ( m) at 31 December 2015 201 Shares in issue 398.1m Free float 100% Code SKS Year end Revenue ( m) PBT* ( m) EPS* (p) 03/14 636.4 30.2 5.7 3.45 13.7 4.4 03/15 601.5 21.7 5.0 3.45 15.7 4.4 03/16e 593.1 21.2 4.2 3.45 18.6 4.4 03/17e 607.6 25.5 5.0 3.45 15.7 4.4 DPS (p) Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Netherlands Commercial progress encouraging P/E (x) Yield (%) Primary exchange Secondary exchange Share price performance LSE N/A Continuing the trend seen at the interim stage, Netherlands was again the star performer, with the self-help initiatives more than offsetting lower recyclate prices. However, the ongoing global commodity crisis had a number of direct and indirect impacts on the Hazardous Waste and Municipal divisions. Shanks has been affected in three main areas: lower waste oil prices, lower electricity generation receipts and lower recyclate prices as it sells by-products from recycling back into the market. While the recent volatility in commodity prices is outside its control, it again demonstrates the clear need for self-help programmes, leaving Shanks a more resilient business and better placed to benefit from an economic recovery. Wakefield PFI asset disposal demonstrating value With group debt levels around 200m, management had indicated previously that disposal of either single or portfolios of PFI assets was likely in the medium term. The 30m cash proceeds from the sale of Wakefield debt and equity releases value, while retaining a 49% interest and a 25-year operating contract. The PFI portfolio was previously valued at 115m and further divestments are likely to give more financial flexibility and redeploy capital to accelerate other growth opportunities. Valuation: Self-help recovery generally intact Despite the global commodity crisis taking the gloss off 2016 results (we are trimming our 2016/17 earnings estimates), we are generally encouraged by the progress of the underlying business. With the major investment in the Municipal division nearing completion (Derby and Surrey, Canada to complete in 2016/17e), we remain confident of a recovery in profits and returns underpinned by the ongoing cost management initiatives. The recent share price weakness caused by nervousness over commodity and recyclate prices leaves the shares at a discount to our valuation range (currently unchanged at 106-130p/share) and supported by a yield of over 4%. % 1m 3m 12m Abs (20.4) (20.4) (22.1) Rel (local) (17.2) (13.7) (11.6) 52-week high/low 112.5p 78.3p Business description Shanks is a leading international waste-to-product company. Its focus is on sorting and processing waste, rather than landfill and incineration, to produce reusable end-products. The business operates in three divisions: Commercial, Hazardous and Municipal. Next event Final results May 2016 Analysts Neil Basten +44 (0)20 3077 5700 Roger Johnston +44 (0)20 3077 5722 industrials@edisongroup.com Edison profile page Shanks Group is a research client of Edison Investment Research Limited
Trading statement February 2016 A strong performance from the Commercial division has not fully compensated for the more challenging conditions caused by the global commodity crisis and affecting the hazardous waste and municipal markets. Results for FY16 are therefore likely to be slightly below our expectations and those of the market, although the group remains well positioned to show strong growth helped by new capacity, margin improvement and cost management initiatives. Divisional commentary Commercial Waste Driven by self-help initiatives, the Commercial division has continued to deliver strong profits growth. Helped by stronger construction volumes in the Netherlands and good cost control, this has been the main driver, although the turnaround here is gaining traction after recent actions in Belgium. Hazardous Waste With c 50% of its revenues exposed to oil and gas, strong performance by the soil and ship treatment businesses were not sufficient to fully offset the impact of lower oil prices on both industrial sludge volumes and industrial cleaning. Despite these short-term issues, the division has continued to invest in new capacity and is still expected to show growth in the current year. Municipal The impact of lower recyclate pricing and weaker offtake markets has affected all recyclers, including the Municipal division. New capacity is now in service at BDR and Wakefield. However, despite the continuous improvement programmes, the division has not been able to fully compensate for the market headwinds and is expected to show a modest decline in profits. With Derby and Surrey (Canada) nearing completion, management remains confident that the long-term business model remains robust and is expected to deliver strong profits and cash generation. Financials Core net debt was in line with our forecast at 201m at 31 December 2015, with the major investment programmes near completion. Following the disposal of the Wakefield PFI assets for a gross consideration of 30m, year-end net debt is now expected to be approximately 196m. The board reiterated that the transaction is consistent with the strategy of actively managing the portfolio of assets. It provides flexibility and enhances the group s ability to redeploy capital for accretive acquisitions or investments, where accelerated growth and returns can be delivered. As such, further disposals are possible, including the PFI portfolio as a whole or packages of individual debt/equity. Revised forecasts Following February s trading statement, we have revised our forecasts to reflect management comments and the impact of the global commodity crisis on the group. Performance in the Commercial division remains robust, but we have modestly reduced assumptions for Hazardous Waste and Municipal to reflect the impact of lower oil and recyclate prices. Comments for the next year remain encouraging, as the company expects a robust performance to more fully reflect the benefit from the ongoing self-help actions and new capacity coming on stream. The main change is the removal of the partial profit contribution of 1.5m following the Wakefield PFI asset disposal. Shanks Group 5 February 2016 2
Exhibit 1: Updated PBT and earnings estimates EPS (p) Clean PBT ( m) Old New Change (%) Old New Change (%) 2016e 4.5 4.2 (7) 22.7 21.2 (7) 2017e 5.3 5.0 (6) 27.0 25.5 (6) Source: Edison Investment Research Exhibit 2: Shanks divisional breakdown and revised 2016/17 forecasts ( m) H115 H215 FY15 H116 H216e FY16e FY17e Revenue Commercial 159.2 154.9 314.1 145.5 152.4 297.9 306.8 Hazardous Waste 69.2 68.8 138 64.4 66.1 130.5 132.5 Municipal 81 76.7 157.7 90.2 82.9 173.1 176.7 Intra segment revenue -4.6-3.8-8.4-3.1-5.4-8.5-8.4 Total revenue 304.8 296.6 601.5 297 296.1 593.1 607.6 Trading profit Commercial 7.2 6 13.2 8.1 7.9 16.0 17.5 Hazardous Waste 8 8.4 16.4 7.3 7.7 15.0 17.1 Municipal 5.7 6.4 12.1 5.2 5.7 10.9 12.7 Intra segment revenue -2.8-4.6-7.4-3.2-4.1-7.3-7.4 Total Trading profit 18.1 16.2 34.3 17.4 17.2 34.6 39.9 Interest -7.2-6.2-13.4-7.1-7.4-14.5-15.4 Associate 0.3 0.5 0.8 0.4 0.6 1.0 1.0 Profit Before Tax 11.2 10.5 21.7 10.7 10.5 21.2 25.5 Source: Edison Investment Research Valuation: Currently unchanged at 106-130p/share Shanks faces a number of short-term challenges caused mainly by the global commodity crisis. We are encouraged by the relatively robust performance and evidence that the continuing self-help initiatives are building further resilience into the group. As a period of major investment and new capacity comes on stream, we are hopeful that the next few years will herald a period of improving margins and returns for the group. Driven by continuing improvement in the Commercial division and a contribution from new capacity in the Hazardous and Municipal divisions, our underlying forecasts for 2017 remain largely unchanged. At this stage, we are maintaining our valuation range of 106-130p per share, which suggests healthy upside from current levels if Shanks demonstrates further progress and builds confidence in its self-help plans to deliver improving returns to shareholders. Shanks Group 5 February 2016 3
Exhibit 3: Financial summary m 2014 2015 2016e 2017e Year-end 31 March IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 636.4 601.5 593.1 607.6 Cost of Sales (530.6) (506.2) (495.9) (503.6) Gross Profit 105.8 95.3 97.2 104.0 EBITDA 88.7 72.6 74.6 82.1 Operating Profit (before amort. and except.) 48.7 36.8 37.4 42.7 Intangible Amortisation (2.8) (2.5) (2.8) (2.8) Exceptionals 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 Operating Profit 45.9 34.3 34.6 39.9 Net Interest (16.0) (13.4) (14.4) (15.4) Associated company 0.3 0.8 1.0 1.0 Exceptionals (52.5) (40.9) (20.0) 0.0 Profit Before Tax (norm) 30.2 21.7 21.2 25.5 Profit Before Tax (IFRS) (22.3) (19.2) 1.2 25.5 Tax (5.9) 2.3 (4.6) (5.5) Profit After Tax (norm) 27.1 26.5 19.4 22.8 Profit After Tax (FRS 3) (28.2) (16.9) (3.4) 20.0 Average Number of Shares Outstanding (m) 397.6 397.8 397.8 397.8 EPS - normalised (p) 5.7 5.0 4.2 5.0 EPS - (IFRS) (p) (7.1) (4.3) (0.9) 5.0 Dividend per share (p) 3.45 3.45 3.45 3.45 Gross Margin (%) 16.6 15.8 16.4 17.1 EBITDA Margin (%) 13.9 12.1 12.6 13.5 Operating Margin (before GW and except.) (%) 7.7 6.1 6.3 7.0 BALANCE SHEET Fixed Assets 741.3 745.0 780.0 803.5 Intangible Assets 212.7 173.8 171.0 168.2 Tangible Assets 327.1 282.9 291.4 297.8 PFI/PPP financial assets 195.6 278.2 306.6 325.4 Investments 5.9 10.1 11.1 12.1 Current Assets 261.0 194.6 192.7 196.0 Stocks 9.4 6.9 6.8 7.0 Debtors 147.0 126.9 125.1 128.2 Cash 104.6 60.8 60.8 60.8 Other 0.0 0.0 0.0 0.0 Current Liabilities (276.8) (400.2) (439.6) (442.2) Creditors (271.4) (262.9) (261.6) (270.5) Short term borrowings (3.7) (75.0) (115.6) (109.3) Short term PFI debt (1.7) (62.3) (62.3) (62.3) Long Term Liabilities (452.0) (350.3) (361.2) (379.0) Long term borrowings (256.9) (140.8) (140.8) (140.8) Long term PFI debt (149.5) (160.3) (171.9) (188.5) Other long term liabilities (45.6) (49.2) (48.5) (49.7) Net Assets 273.5 189.1 172.0 178.3 CASH FLOW Operating Cash Flow 73.2 69.2 52.2 86.2 Net Interest (18.3) (13.4) (16.2) (17.6) Tax (1.6) (5.7) (2.3) (2.8) Capex (42.7) (42.1) (61.6) (45.9) Acquisitions/disposals 22.4 (1.5) 16.0 0.0 Financing 0.2 0.0 0.0 0.0 Dividends (13.7) (13.7) (13.7) (13.7) Other (49.3) (63.2) (26.6) (16.6) Net Cash Flow (29.8) (70.4) (52.2) (10.3) Opening core net debt/(cash) 177.3 156.0 155.0 195.7 HP finance leases initiated 0.0 0.0 0.0 0.0 Other 51.1 71.4 11.6 16.6 Closing net debt/(cash) 156.0 155.0 195.7 189.4 Source: Company accounts, Edison Investment Research Shanks Group 5 February 2016 4
Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmbasicdetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Shanks Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are wholesale clients for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a personalised service and, to the extent that it contains any financial advice, is intended only as a class service provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ( FTSE ) FTSE 2016. FTSE is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 Shanks Schumannstrasse Group 34b 5 February 2802016 High Holborn 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 5 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand