Britain, long known as “the dirty man of Europe”, has been attempting to rid itself of the unwelcome epithet. But when it comes to disposing of our waste, much remains to be done; households generate 27 million tonnes of rubbish a year. According to Government department DEFRA, a decade ago only 7% of England’s household waste was recycled. Helped by the Household Waste Recycling Act three years ago, this figure rose to 27% in 2005-2006. That might sound good, but quite apart from the fact that, for many UK councils “recycling” appears to mean “shipping to China”, anyone who thinks we are doing well should note that the Act has established targets of at least 30% by 2010 and 33% by 2015. We are also still way behind our EU neighbours: Germany’s recycling figure is 57%, the Netherlands 64%, while Flanders in Belgium manages an impressive 70%.
Landfill sites have always been the cheap option for disposing of our waste, but the 1999 European Landfill Directive has decreed that EU members must find cleaner ways of dealing with their muck. The UK faces heavy fines if it hasn’t cleaned up its act significantly by 2010, so “pressure has been applied to local authorities”, says Anna Bawden in The Guardian. The result? Councils that only a few years ago couldn’t care less where waste went are scrambling to build new treatment and recovery plants through public finance initiative contracts.
It’s working. The 2005-2006 figures show a 3% drop in municipal waste, while the amount sent to landfill fell by 10% to 17.9 million tonnes. But it’s not yet working well enough. The number of working waste sites has declined from about 3,400 in 1994 to just over 2,200 and space approved for landfill is expected to run out in the next five to ten years. EU regulations also mean that since 2004 hazardous waste such as asbestos, acids and pesticides can no longer be disposed of alongside non-hazardous materials, meaning there are only around a dozen specifically engineered sites that can cope with this toxic waste. Britain’s councils have a long road ahead of them if they want to do everything the EU requires.
On the plus side, waste disposal also offers a range of business opportunities, from composting technology that can divert waste from landfill, to schemes that use landfill gases from food waste for power generation. Also, businesses have sprung up that refurbish and recycle used goods that would otherwise be destined for dumping. Manchester’s Recycle IT! mends computers and sells them cheaply to charities, Liverpool’s Furniture Resource Centre refurbishes furniture for low-income families and charity Green-Works performs a similar salvage job on office furniture.
Consolidation in the waste management sector
Meanwhile, the UK’s waste-management industry, already worth an estimated £7bn, is rapidly consolidating. Its largest player, Waste Recycling Group, was sold to Spanish construction giant FCC in July for £1.4bn, three years after Guy Hands’ private-equity group Terra Firma bought it for £531m. The second largest, Biffa, is also seen as a takeover target after its demerger in October from parent Severn Trent. With reports suggesting that investment of £10bn-£12bn is needed for 1,500 new facilities to recycle, reprocess, treat and dispose of waste if Government targets are to be met, prospects for the sector’s future growth are strong. Below, we look at three companies that are likely to benefit.
The three best bets in the sector
The rising cost of dumping rubbish at landfill sites – and the high barriers to entry for potential rivals – has boosted profits at water and waste management firm Pennon (PNN, 570.5p), whose site operator Viridor foresaw the shortage and has been able to charge local councils more. In addition, Viridor’s renewable energy output has tripled in the past five years. Pennon’s shares had a strong run in 2006, but are tipped for further growth.
Another company with a sizeable share of landfill capacity is Aim-listed Augean (AUG,138.25p), but the stock was dented in 2006 by two profit warnings within a year and the departure of its chief executive, John Huntington. However, Irish investor Philip Lynch took this as an opportunity to build up a 26.9% stake and Augean’s long-term prospects look good as it is one of the few operators with sites able to accept hazardous waste.
The scarcity of sites also favours TEG Environmental (TEG,82.5p). The firm’s green technology diverts organic rubbish, such as sludge and kitchen waste, from landfill and its ‘Silo Cage’ system converts it into natural organic fertiliser. In September, the firm announced first-half revenue had soared to £1.07m, from £9,286 a year earlier, and its joint venture is keenly bidding for local authority contracts.