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MARKET COMMENT
By
Albert and Harold Steptoe knew long before waste recycling became fashionable that there was money to be made from other people's rubbish. Some of the major players in today's waste recycling industry started from those humble Steptoe-like beginnings. Take Biffa, for example, one of the leaders in the field of waste recycling. The company kicked off in the early 1900s with the Biffa family taking away the "muck" from coal-fired power stations using horse-drawn carts. (Whether old man Biffa nibbled at his picked onions when sat in the bath remains unclear.) Of course, Biffa is now a much more sophisticated organisation and it is also an integral part of Severn Trent (LSE: SVT), the water company. Other businesses that are key players in the waste recycling sector include Cleanaway, which is part of Brambles Industries (LSE: BI.) and Corey Environmental, part of Exel (LSE: EXL). Vividor, a subsidiary of Pennon Group (LSE: PNN), is another significant player, as indeed are Waste Recycling Group (LSE: WRC) and Shanks (LSE: SKS), the only two pure-play stock market-listed recycling companies. Waste recycling has moved, very much, into the fore today as industrialised countries realise they could soon run out of sites for dumping waste. Britain, together with France, Italy, Spain and Ireland, are some of the least efficient in terms of recycling waste. These European countries prefer to dump their rubbish into landfill sites or just burn them via incinerators. However, the Government is making it less financially rewarding for companies to simply dump their rubbish. To reduce the amount of waste, the landfill tax will become increasingly more punitive. It is estimated that only about 11% of waste in the UK is recycled. This compares very unfavourably with Germany, where almost half their total waste is reused. The difference demonstrates, to some extent, what is possible if the right incentives are put in place. Some might say punitive measures may be required to spur businesses into recycling. At present, the domestic waste recycling market is estimated to be worth about £4.5b. This could easily grow to five times that size if the German levels of recycling are achieved in the UK. For the incumbent players, many years of growth could lie ahead. If we assume that it could take ten years before we achieve German levels of recycling, it would imply an annual growth rate of around 20% for the industry. Investors, however, should take care. Growth in excess of 20% a year has been factored into many of these companies' valuations. Additionally, a high growth sector such as this will also attract lots of competition. It is true that there could well be brass where there is muck. However, you could also find something unpleasant at the bottom of your shoe if you don't tread carefully around rubbish dumps.