Waste recycler Shanks rides out Dutch construction slump

By Richa Naidu

Nov 20 (Reuters) - Shanks Group Plc (Other OTC: SHMCF - news) , a British waste management company, is betting on a long-awaited recovery in the Dutch construction market to drive growth in 2014 after cutting costs to stay in profit.

Shanks, the No. 1 solid waste company in the Netherlands by revenue, has no plans to reduce its exposure to a Dutch construction market in its sixth consecutive year of decline.

"I'd say it's exactly the opposite," Peter Dilnot, the company's chief executive, told Reuters in an interview. "We've got a clear strategy to win."

Shanks, which recycles bottles for brewer Heineken NV (Other OTC: HEINY - news) , embarked upon a cost-cutting programme last year with the aim of saving 19 million euros ($26 million) by 2016.

This has helped the Milton Keynes, England-based company to counteract a pricing squeeze at its European solid waste operations, which contribute about half of its total revenue.

That portion of the business handles non-hazardous waste, such as construction debris, and collects and treats garbage from households in Belgium, the Netherlands and Luxembourg.

Property prices in the Netherlands have been tumbling since 2008, a decline exacerbated by uncertainty over a crippling income tax rate - 52 percent for people earning more than 150,000 euros a year - which has deterred would-be home buyers.

But the rate of decline is slowing. Residential property prices were 4.1 percent lower in September than a year earlier, compared with a 4.4 percent drop in August, according to Statistics Netherlands. ()

In its latest quarterly Dutch Housing Market report, Rabobank said it expected property prices to stabilise in 2014 after a pick-up in sales during the fourth quarter of 2013.

"When there is a macro recovery - and there clearly will be one - we're going to be very well-placed in terms of operational gearing," said Dilnot, who once flew helicopters while serving in the British Armed Forces.

Jefferies & Co analyst Justin Jordan, noting a slight rise in the price of recyclable materials, said Shanks Group's operating profit was likely to improve by about 2 percent for every 1 percent rise in volumes of waste treated.

Shanks Group's shares closed on Tuesday at 107.0 pence, below its intrinsic value of 120 pence, according to Thomson Reuters StarMine's model of how much a stock should be worth when considering expected growth rates over the next 15 years.

The stock has risen 23 percent since the start of the year.

'FORENSIC'

Tijs Hollestelle, construction and industrials analyst at Dutch financial group ING, describes the Netherlands as "one of the worst-performing construction markets within continental Europe".

It has been a tough few years for the companies that strip recyclable materials, such as metal, glass, plastics and paper, from waste. As prices have languished, competition has intensified between Shanks and its handful of European rivals.

Suez Environment, the world's No. 2 waste and water group after France's Veolia, said last month that the real estate slump in the Netherlands had led to a decline in construction and demolition waste.

And when privately owned competitor Van Gansewinkel Groep reported its 2012 annual results in April (Berlin: B2B.BE - news) , it said weakness in the Dutch industrial and construction sectors would put pressure on its waste collection volumes in 2013.

Van Gansewinkel, which declined to comment for this article, has reduced its full-time workforce by 10 percent and closed four of its eight operations.

Shanks, also conscious of costs, agreed last month to sell its British solid waste business to privately owned peer Biffa, and is closing two small sites in the Netherlands and Belgium.

Analyst Jordan said early signs of the cost cuts were evident in Shanks Group's strong first-half results. Profit rose 9 percent in the half year ended Sept. 30.

"The company is being quite forensic in going through each operation in the Netherlands, Belgium and indeed in Britain, trying to find operational inefficiencies," said Jordan.

He said the price of recyclable materials had begun to rise slightly due to a modest macroeconomic recovery.

A business survey published at the start of October showed that Dutch manufacturing activity grew in September at its fastest pace in 29 months.

The seasonally adjusted NEVI/DPA Purchasing Managers' Index, compiled by Markit, rose to 55.8 in September, its highest level since April 2011, from 53.5 in August.

Hollestelle also expects a recovery.

"The general thought is that ... the market will hit the bottom next year, and from then on there might be some growth," he said.