Investment Column: Waste Recycling finds little left to pick up

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Waste Recycling finds little left to pick up

RUBBISH IS, of course, big business. The UK waste and recycling market is, however, highly fragmented and contains only two big players. Since floating at 50p in 1994, Waste Recycling has grown into a pounds 0.5bn company. Its shares closed down 4p at 433.5p yesterday. Unlike its similar- sized quoted rival, Shanks & McEwan, it has no involvement in rubbish collection. Its growth strategy does not involve breaking into Shanks' business, but in picking up its smaller private rivals in local recycling markets.

The group has done well from this strategy. John Huntingdon, its managing director who seems likely to become the next chief executive, says most once publicly owned waste businesses are shockingly inefficient. In buying up these operations, Waste Recycling eliminates a competitor and brings economies of scale to bear on the enlarged operation.

Acquisitions also present opportunities for headcount reduction and outsourcing. When the group finishes integrating the waste businesses it acquired from Yorkshire Water in January and April, it will have cut 15 per cent of the new workforce. Those businesses had margins of just 16 per cent; Waste Recycling's are typically 34 per cent.

Mr Huntingdon admits there is little opportunity for further streamlining of the group's current portfolio, so acquisitions will be the driver of earnings growth.

The problem with this strategy is that each bolt-on has a progressively smaller impact on earnings growth. Admittedly, the group says it's planning a sizeable recommended merger, which would involve issuing shares, within two years. But other than Shanks, sullied by its unwanted rubbish collection arm with it, there are no obvious candidates in the UK. Moreover, the 46 per cent holding Yorkshire acquired following this year's deals complicates the group's attraction as a partner, though that would change were Yorkshire itself bid for.

Merrill Lynch expects full year pre-tax profits of pounds 29m and earnings of 16.3p per share, putting the shares on a forward price-earnings ratio of 26. That's in line with the market, but there are too many uncertainties surrounding the future of Waste Recycling to make it an attractive investment. Having come off their all-time high of 504.5p, the shares are fairly priced.