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Environmental Group (EGL): Raise the bat

EGL to deliver 50% earnings growth in FY23e

EGL has provided a trading update for FY23e ahead of Bell Potter forecasts. The company now expects FY23e underlying EBITDA of ~$6.6m, which implies YOY earnings growth of +50% and compares to previous guidance of $5.9m (BPe prev. $6.0m). As part of the announcement EGL commented on a “particularly pleasing” 4Q23 work rate, with strong performance across ongoing services/projects and minimal contribution from the recent Airtight acquisition completed in May’23.

TAPC and EGL Energy leading the way

In our view, EGL’s trading update and strong 4Q23 exit rate suggests most if not all of the company’s segments are performing  ahead of our expectations. However, we believe commentary provided by management would look most consistent with some strong contribution out of TAPC, where EGL has recently achieved a step-up in service level revenues and has ongoing air emissions contracts with Hastings Technology Metals ($17.8m) and Covalent Lithium ($5.2m) refineries. Heading into FY24e we see pipeline opportunities emerging with an additional 5 major battery minerals processing/refinery projects ahead of their 2025-26 production dates.

In addition, we expect improved margins from EGL Energy with boiler costs such as steel, freight and valve prices having normalised from 2022 highs (EGL was adversely impacted by -$0.5m in 1H23). We also see the potential for another strong FY24e for EGL Energy following the exit of several key regional competitors.

Investment view: Maintain Buy recommendation

Our EPS changes are 8%, 3% and 1% across FY23-25e. Given the project oriented nature of two of EGL’s segments, the key unknown for us at this stage is whether an element of the company’s larger project pipeline was front ended into FY23. Whilst we await further visibility at the FY23 result, EGL continues to be one of our top picks with potential earnings and/or news flow catalysts over the next 12 months including: (1) PFAS separation plant sales; (2) conversion on a ~$115m waste pipeline; and (3) potential further air pollution control projects in battery minerals.

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Authored by Sam Brandwood – Analyst – at Bell Potter Securities, 17 July 2023
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