E.G.L. - it’s in the name

Joshua Baker

Capital H Management

For readers that may identify as “boomers”, the title is a play on the slogan used by EA Sports for around two decades in the loading screen intro of its sports video games. In this case, EGL is an acronym for The Environmental Group Ltd which, as you may have now guessed, is a business exposed to broader environmental trends.

EGL’s key solutions are focused on emissions control and water pollution, with the latter potentially a breakthrough solution for a group of chemicals that various organisations have labelled the next asbestos.

Before we sink our teeth into the key growth areas for EGL, here is a quick rundown of the company’s five divisions:

  • Baltec IES: provides a range of equipment for gas turbines predominately used in power generation such as diverter dampers, inlet filter houses and silencers. The drivers of this business are the transition to renewables and the bridging solution that gas turbines provide.
  • Tomlinson Energy Service (TES): is a leading provider of a range of boiler units across Australia used by hotel operators through to biomass power generation boilers. It was acquired from RCR Tomlinson (RCR) in early 2019 out of administration. The business generates a relatively high level of ongoing service and maintenance revenue. Similar to Baltec, key drivers are customers seeking responsible energy solutions such as biomass boilers.
  • TAPC (Total Air Pollution Control): provides a range of emission control units such as electrostatic precipitators, flue gas desulphurisation and scrubbers used across heavy industries. Like TES, the business generates a relatively high level of ongoing service and maintenance revenue. Tailwinds exist for this business, primarily from the battery metal CAPEX cycle, with a pipeline of new refineries planned in WA over the next 3 years.
  • EGL Water: This division was created in late 2017 with a view to develop treatment solutions for the mining and industrial sectors. Since then, the water division partnered with Victoria University to develop a solution for the rapidly emerging issue around PFAS (Per- and polyfluoroalkyl substances). We will touch on the powerful thematic behind this business in a moment.
  • EGL Waste: This is a new albeit smaller division which is essentially an agency agreement with Turmec, an Irish based waste recycling specialist. Under this agreement, EGL is Turmec’s local sales, engineering and service agent for their waste recycling solutions in Australia.

Why are we excited about EGL today?

While we believe Baltec and TES will continue to be profitable, steadily growing core divisions for EGL, we think the real excitement comes from a refreshed board and management who can take the company’s strong competitive position and IP within TAPC and EGL Water to drive accelerated top and bottom line growth in the business over the next 3yrs+.

TAPC is the first exciting division as it is exposed to the mining capex cycle and in particular, battery metals. Processing and refinery operations for Rare Earths, Lithium and sulphide ores (i.e. refractory gold) require emission control units of which TAPC is one of few providers globally and the only one located in Australia.

We believe that being local whilst international boarder restrictions exist provides a stronger than ever advantage for TAPC to win tenders within Australia. In addition, given the specialised nature of their solutions, they are likely to be relatively immune to margin compression due to input costs and labour.

The pipeline of work in Australia alone could be extensive given the long term pipeline of lithium refining operations from the likes of IGO, Covalent and Albemarle, in addition to the pipeline of rare earth refineries from LYC, HAS, ILU and ARU. These contracts can range from $5 m to $15m depending on the scale and complexity of the operation, which sets a backdrop where the division could consistently generate revenues of $8m+ p.a. for the next 3yrs+ versus the ~$5m p.a. achieved over the last few years.

The most explosive, although a riskier driver for accelerating growth is EGL Water as it proves the commercial efficacy of its PFAS water treatment solution. PFAS are chemical compounds which have favourable properties, such as heat resistance and oil/water repellent, and are very durable to the point they are called ‘forever chemicals’ because they don’t naturally break down. These properties drove widespread usage in industrial, commercial and consumer products such Teflon coated pans and their former use in firefighting foams .

PFAS enters the environment through industrial production, product use and waste streams in which it then disseminates into the broader environment, generally through groundwater. As it’s a forever chemical, PFAS doesn’t break down so it bioaccumulates in the environment whereby continued bioaccumulation results in biomagnification, meaning PFAS chemicals can continue to build to a level where it could represent broad health risks to humans .

A body of evidence continues to grow on these potential health impacts and is now at the point where authorities across the world are putting in place standards or regulations around PFAS , either through limiting the use or banning specific PFAS chemicals and treating wastewater .

Today, removing PFAS from water is possible and increasingly done at water treatment facilities, however, it generally relies on the use of activated carbon, ion exchange or reverse osmosis in which each method has various levels of efficacy, whilst these solutions are also considered relatively expensive . Once removed, the PFAS is disposed of using thermal destruction solutions such as a plasma arc furnace .

Greater awareness of the potential impacts of PFAS is driving greater political and regulatory pressures with a prominent local example being the suspension of tunnelling activities for the Westgate Tunnel project in Melbourne. TCL and its partners had to suspend tunnel boring until they found a solution for the disposal of the soil which contained elevated levels of PFAS.

We think this example shows the start of a shift towards a proactive enforcement of PFAS management. It creates a powerful economic incentive for managing it as the TCL example resulted in large cost overruns for the project and a positive backdrop for companies like EGL who can develop more practical and cost-effective solutions to treat PFAS contamination.

In late August, EGL announced that their novel solution has demonstrated the removal of more than 99.4% of regulated PFAS from liquid waste streams in pilot trials . Upon this success, they moved to commercial scale trials with their partner Reclaim Waste at their EPA licenced waste management facility in Melbourne. Should this commercial scale trial be both successful and be EPA approved (expected 1H FY22), we expect commercialisation to occur rapidly with their first commercial plant(s) being rolled out as early as this financial year.

EGL has indicated that it will likely go down the path of licencing the technology to waste management companies who are at the coal face of having to manage PFAS contaminated waste. This model would generate revenues and profits from being paid for a plant build and deployment, ongoing maintenance and a royalty per litre processed. We think this model is beneficial for a company of EGL’s scale as it avoids a big spending requirement to compete with established waste management companies.

EGL has always showed promise but has never been able to sustain strong growth or margins over time. The key difference now, and what underpins our confidence in the thesis, is the refresh of the board and management in early 2021.

This began in February when Jason Dixon was appointed CEO, previously an Executive General Manager with Tox Free until its acquisition by Cleanaway (CWY) in 2018. In that role Jason oversaw acquisitions worth approximately $400m and we think it is likely that M&A will be a key part of the growth strategy at EGL.

We believe a new professional management will improve all divisions but that it primarily gives EGL an edge to sell its PFAS solution to waste companies, given Jason’s industry experience and relationships. There is also an aligned incentive to make it work as Jason owns ~4.8% of EGL and the newer directors have been buying stock on market since the FY21 results.

Valuation potential and key risks

FY21 was a tail of two halves for the company with the first half influenced by choppy operating conditions and JobKeeper, whilst the second half was a clean result.

Given the sustained contracted pipeline across key divisions, we think annualising the second half gives a representative snapshot of the business. On that basis in it is currently running at an EBITDA of $3.3m p.a. for an EV/EBITDA multiple of ~9.3x. EGL is guiding to EBITDA growth of at least +15% YoY which is $3.8m+ for a multiple of ~8.1x.

We think this represents a fair multiple for the core business and its near-term growth prospects whilst it ascribes zero value for the enormous potential of the PFAS solution being proven commercially successful.

We believe that EGL can beat this guidance given the potential in the TAPC division (which is only improved by the current heat in the lithium and rare earth markets), potential for tendering success with Turmec under EGL Waste and the first commercial sales of their PFAS water treatment solution. Should EGL rollout the latter with major waste management companies across the country, we think it could drive a re-rate of the share price by up to 5x in the next three years or more.

In terms of peers, SciDev (ASX:SDV) is a business we know well and note it also has a burgeoning PFAS solution in market. Revenue and earnings for both businesses are similar ($45m and $3m+, respectively), yet SDV’s market cap is $140m+ vs EGL at <$40m.

We would point out that SDV trades on that higher multiple partly due to the excellent execution of Lewis Utting and his management team, and EGL will need to see the same from Jason and team to justify something similar. But the potential is certainly there.

The following are key risks to note that could derail the opportunity we see in EGL:

  • A rapid adoption of renewables and lesser utilisation of bridging solutions like gas gen reduces the long term opportunity for Baltec
  • A turn in the mining cycle, and in particular the battery metal cycle, reduces the project tendering opportunity for TAPC
  • Failure to prove their PFAS treatment solution on a commercial scale thus killing off the company’s biggest and punchiest growth opportunity

Overall, we think EGL is a compelling investment opportunity as it has a strong growth outlook driven by increasing environmental pressures and regulation across multiple sectors, whilst at current, we think it offers a free option on the highest growth potential division within the company, EGL Water.

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Disclaimer: Any information contained in this article is limited to general information only, whilst the opinions and views detailed are those of the author only, and as such does not constitute advice or a recommendation in any capacity. The information contained in this article has not taken into consideration your specific financial needs, goals or objectives, so please consider consulting a licenced adviser before considering acting on this information.

The Capital H Inception Fund holds shares in EGL at the time of publishing.

Portfolio Manager
Capital H Management

Joshua has worked as an Investment Analyst across different verticals of the financial sector for 9+ years. Experience includes equities research (long/short), manager research and multi-asset portfolios.

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