The Investment Column: Bid may drag waste sector out of dumps

Whatever happened to Britain's waste management industry? Lauded as one of the great green growth industries in the 1980's on the back of increasing environmental awareness, investors have seen a mixture of lack of demand and falling landfill prices combine to drive down share prices of companies like Shanks & McEwan, Leigh Interests and Caird.

That could be about to change. Yesterday's confirmation of a possible bid for Leigh from General Utilities, the British arm of French giant Compagnie Generale des Eaux, may signal a slow, but sure turning point for the industry. The bid lifted Leigh's share price 27.5p to 146.5p, valuing the company just short of pounds 98m.

Investors will be suspicious of another false dawn. Waste management had all the features of a fantastic sector in the mid-Eighties. A tide of environmental concern about waste disposal was sweeping into Europe from the US. And with well over 2000 players in the UK, investors saw an opportunity for heavyweights to mop up the cowboys.

Not only did enforcing legislation turn out to be more difficult than expected, but the recession hit. Industrial production fell and with it industrial waste production, the most profitable market for disposal. Moreover industrial producers, trying to conserve costs, stockpiled waste, driving volumes even lower. Meanwhile the waste companies were battling for market share, undercutting prices.

Now, though, the waters look clearer. Players like Shanks are taking a more sensible approach to pricing. With high fixed costs, any boost to the top line makes a big difference to profits. The introduction of the landfill tax last October, which increased costs of inert waste disposal by some 50 per cent, has also helped, encouraging industrial customers to seek non-landfill disposal such as incineration, given recent impetus by more stringent environmental regulations. In a still fragmented sector, the large waste companies are able to offer these higher-margin services.

Forward ratings of 17 times for Shanks and 16 for Leigh , on SBC Warburg estimates, mean these companies are no longer dirt cheap, though Shanks could still be a tempting morsel.

Caird, on the other hand, looks good value on 11 times on NatWest Securities forecasts, particularly with a new pinch of bid spice in the air.