EGL announced its annual results last week.

In essence, revenue was up 22% to $57M, EBITDA up 34% to $4.4M and NPAT was $1.6M. Management had predicted that EBITDA would increase at least 15%, upgrading that to 30% as discussed in my last post. The main drivers for revenue were Tomlinson (boilers, autoclaves and energy services) $27.9, Baltec $19.3M and TAPC $7.9M. The most profitable segments of the 'One EGL' Group were Waste (90% margin) and TAPC (16%). The most anticipated profit driver- EGL Water (PFAS extraction) has yet to contribute. As I have said repeatedly, EGL is an engineering company and should be viewed as such. Margins in engineering are characteristically low. Worley Parsons had a margin of profit of less than 3%.

However, there are several reasons why I continue to hold shares in EGL and why I am still recommending it to members as an investment:

1. The Company has moved towards an entrepreneur-driven, management-focused business under Jason Dixon while retaining its quality engineering business.
2. It is rapidly expanding into areas that broaden its environmental credentials and which complement each other. For example, its waste management division (Turmec) has allowed on-selling by other divisions like asbestos detection, dust extraction, boilers, and extraction of water contaminants. EGL receives a 2% commission for the commissioning of new Turmec recycling centers and derives further income from ongoing parts and service contracts.
3. The interests of management are aligned with shareholders. Jason Dixon (CEO) and Paul Gaskett (National Sales Manager) both have significant shareholdings
4. EGL Water seems to have technology that may ameliorate or solve a major water and ground contamination problem (PFAS). EGL raised $4.5M in a private share placement last December and has sufficient funds to fabricate more than 10 PFAS Extraction plants. The first plant is soon to be placed into operation. There are orders for 8 or 9 more. It is likely that the technology will be licensed to Turmec. Turmec has a strong presence in Northern Europe. EGL will then derive a loyalty stream that will diversify it from the traditional engineering model. Entrance into the American market is not expected for another year. A lot will depend on the success of these early plants and therein lies the skill and versatility of the engineers at EGL. For that reason, I consider profits from EGL water to be speculative but potentially transformative to the Company.

I retain my prediction of revenue exceeding $100M in 2 years with improving margins, provided that inflation and supply chain problems can be kept under control. The company has shortened its valid pricing times to 30 days for new work but unconstrained inflation and recession are risks for this Company, as for all companies in the engineering and manufacturing sector.

disc: I own shares

EGL offered a trading update on Wednesday, advising that EBITDA for 2022 would be approximately 30% up on last year. Management had predicted 15% increase in EBITDA yoy and a higher number was expected by the market (see my previous straws on this Company). Drivers of revenue are TAPC, Tomlinson and some flow-on of business from their involvement as an intermediary in Turmec waste management in Australia. They have also purchased an additional business (Ignite) which is complementary to Tomlinson. Ignite Services install, service, and maintains gas-fired equipment across a range of industries including mining, waste management, production facilities, and industrial food processing plants. I can't say how this business will grow profit because I don't know much about it. My feeling is that it will not make a material impact.

My underlying thesis with EGL, and the reason I recommended it to SM members, was because it had the foundations to be a profitable engineering business but had suffered from a legacy of inept management with a focus more on engineering than profit. This changed when Jason Dixon took over as CEO in January 2021. Jason has correctly perceived that EGL offers quality engineering services but has not been run efficiently for shareholders. Revenue was lumpy, margins were low and services were constrained in scope and location. There was also a disasterous foray into industries that were not core to the Company, like water management and Mining Assist. Company overheads were also excessive. Ellis Richardson, the previous owner of Baltec and then CEO of EGL, did not run the Company with public shareholders in mind and sentiment towards the Company was poor. It has taken time to re-orient the Company and to work through the less profitable engineering projects.

If EGL is well run, I expect that revenue can grow to $100M in 2 years, perhaps double that in 4 years. At a profit margin of 4%, I expect EBITDA of $4-8M in 2 years with NPAT of $2.2-$4.5M and EPS 0.7-2c. At P/E 12-14 this equates with a share price range of $0.8-$0.28. This would suggest that EGL is relatively overvalued at the moment. I am willing to buy at the present price because the Company is pushing forward into new markets like PFAS removal from groundwater which could be transformative to the Company and Jason Dixon has significant shareholding which will incentivize him to achieve growth towards the higher-end of his previous estimates.

Discl: shares held

EGL presented its half yearly results on Friday

On a profitability basis, the results were underwhelming. EBITDA was $1.7 M, contributed entirely by the Tomlinson boiler division which saw orders increase substantially with the recession of Covid. TAPC was hampered by restricted site access in Western Australia where it has large contracts with Lithium mines. Baltec has been a drain on the working capital of the Company and is still working through a legacy of poorly priced, low margin jobs- a legacy of the former management. Shipping delays and increased costs also hampered profitability.

Turmec's arrival in Australia is timely because it has technology that substantially reduces landfill from recyclable waste. EPA has imposed levies on waste disposal facilities and the price of landfill has gone up 30-40%. I have written before about the urgency to improve recycling in Australia. Australia has lagged behind in recycling because of cheap landfill and a ready market for its plastic waste in China and Southeast Asia. This has changed quickly. Both domestic and industrial waste is affected. Turmec recently signed an agreement to provide recycling for a large construction and demolition plant in Brisbane.

EGL, as the sole agent for Turmec in Australia, has already tendered for $100 M in projects, an increase of 100% in 3 months. While the 2% commission flows directly to EGL's bottom line, it is the service revenue, spare parts and cross-selling of its vapour control, boilers, engineering and water treatment solutions that are the true prize for EGL. Turmec provides EGL with an entree to a lucrative sector to which it can offer many of its environmental solutions.

I have also written about the new PFAS water treatment technology, in particular about the decision to proceed with commercialization in December last year. I feel that the Board was not upfront with shareholders when they covertly raised $4.5M from 'high value' investors before making any market announcements. Notwithstanding, the Company is now designing a commercial plant with a new configuration to upscale its technology. The plant should be operational towards the end of this year. If successful, it will open the door for similar projects, some of which may be outsourced to engineering companies overseas. The Company has desisted from making any financial projections from this employment of this technology and without their guidance, I'm not willing to make any guesses.

In summary, while I have concerns about the conduct of the Board as regards its transparency with shareholders, and I disapprove of the way it has favoured privileged institutional shareholders over others, I have no argument with Management in the way they are trying to open new markets for their services and exploit the synergies among its divisions. They are also more aware of realistic pricing. New engineering projects priced at 26% margin vs 15% previously. EGL has always offered excellent engineering services but the business has not been run for the benefit of shareholders. As a very long-suffering shareholder, I have chaffed under the management of one incompetent manager after another but I am more hopeful now than ever that this is about to change.

I expect EBITDA to rise to $4.5M for FY22, with an increase of 15-30% per year for the next 3-5 years

EGL had its AGM yesterday. Management and the Executive discussed the usual platitudes, I felt it necessary to ask some questions and the replies can be seen here https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02457958-2A1341591?access_token=83ff96335c2d45a094df02a206a39ff4

I can't give you numbers but I expect to see a significant increase in EBITDA in FY22. Corporate overheads will have increased however, since EGL is a now a bigger organisation than when it started the year.

Commercial trials using EGL's patented PFAS water treatment are underway and I am hoping an announcement will be made at the end of the year or early in the new year

disc: I hold EGL

Josh Baker, analyst from Capital H. Management, just wrote a bull case on EGL https://www.livewiremarkets.com/wires/e-g-l-it-s-in-the-name

Capital H. Management recently became the first institutional shareholders in the Company. EGL's water treatment process for PFAS would be transformative for the Company but it first needs to succeed in commercial trials, and this is certainly not a 'given'. Even without EGL water, I think that the Company can grow its bottom line by 15% per year by maximizing its product offering from Total Air Pollution Control, and through synergies created by its agency agreement with Turmec

For information on the environmental impact of PFAS see https://www.epa.gov/pfas/basic-information-pfas

Dear Members,

You may be interested in a core holding of mine- The Environmental Group (ASX:EGL). EGL is fundamentally an engineering company. It specialises in the design, application and servicing of gas and vapour emission control systems for industry and mining. It also designs and installs equipment that improves the efficiency of gas turbines, supporting the renewable energy industry by contributing to peak load electricity supply.  

In January 2019 EGL acquired Tomlinson Energy Services from RCR Tomlinson administrators. Tomlinson Energy replaces, services and maintains commercial boilers for a variety of industries.

There is also a fourth division to EGL. This is a water services division which uses a patented technology to remove PFAS from groundwater and potentially contaminated soils. The technology is yet to become commercialised but pilot tests were successful in removing more than 99.4% of PFAS. Commercial trials will be underway this half.

In February this year, EGL acquired Active Environmental Solutions (AES), an Australian Company with an agency agreement with Turmec Pty Ltd (Ireland). Turmec designs and manufactures waste recycling plants. Their expertise involves recycling of municipal, construction-and-demolition, glass, rubber, plastic and other waste. Waste material is diverted to re-manufacture as a substitute for raw materials, and as an alternative fuel source. The acquisition of AES was timely. In 2018 China banned 24 types of waste and enacted anti-dumping legislation that prevented developed countries from sending their unprocessed waste to the country. Exports of some waste materials, particularly mixed polymer plastics, are now stockpiling in Australia or being diverted to landfill. The Recycling and Waste Reduction Act 2020 will prevent export of plastics after July 2022 that have not been sorted into a single resin or polymer type or processed with other materials into engineered fuel. State and local governments have agreed to targets set by the Australian Packaging Covenant to recycle or compost more than 70% of plastics by 2025. Currently, Australia recycles less than 20% of plastics. The task is daunting and the expertise and technology of companies like Turmec will be invaluable. Turmec’s plant designs use optical and magnetic elements and robotics and have a recovery rate of 99% with minimal labour requirements and reduced need for landfill.

The Agency agreement with Turmec provides for a retainer to promote and raise brand awareness, success-based commissions for sales in Australia and a cost-plus pricing model for all engineering, maintenance and services provided in Australia.

Perhaps more importantly this acquisition signifies a turning point for EGL- from an engineering contract-based enterprise to a fully-integrated recycling, waste management and environmental-focused company. There is the opportunity for EGL to cross-sell its other environmental services, such as water management and air pollution technologies that prevent harmful gases, particulate matter and odours from being released into the environment. It provides synergies for all of its divisions, sets up a platform for growth and, by servicing its customer base, creates recurring revenues.

EGL has a market cap of $28.1M and a book value of $17.9M

Based on the latest company results for FY’21:

Revenue          $46.6 M (2020: $37.5M)

EBITDA            $3.1M

NPAT               $1.7M

Cash                $0.6M

Debt                $1.95M

EGL trades on a P/E of 17.2, which compares favourably with competitors: Pact Group 14.2 and Cleanaway 34.4

EGL has been a poor investment over the past 10 years due to a legacy of poor management, low-margin engineering contracts, and a lack of clear strategy and business focus. With the new management team (Jason Dixon CEO) and the relinquishment of control of the company by the dominant shareholder- Ellis Richardson- who recently retired from the Board and is selling down his 41% stake, the path is clear for expansion of the Company and fully realising its potential as ‘The Environmental Group’. Management has confidently predicted an increase in EBITDA YOY of 15% (subject to the impact of ongoing Covid lockdowns) but this ignores the potential for big contract wins by Turmec, and successful commercialisation of PFAS extraction by EGL water. PFAS contamination is a growing environmental problem with carcinogenic and other potential health effects and no commercially successful solution.

The Company is set to ride the groundswell of public opinion regarding environmental sustainability and protection and would therefore be of interest to ESG-focused investors. Its small size has eluded cover by analysts and small cap. managers and may be about to change, which could build momentum in the share price.