Green shoots spotted among the rubbish

Most consumers accept that separating their recyclable waste into boxes for the local council is a necessary, if rather dull, chore. But few realise that recycling could boost their investment portfolios.

Specialists in renewable energy investment say that the case for investing in waste management companies is getting stronger, in spite of the recession. Many even claim it is recession-proof, as people are continuing to recycle more.

Last month’s Budget gave a significant boost to waste management companies, as it increased the tax on local authorities for sending waste to landfill. As a result, local authorities will have to step up their efforts to find alternatives to landfill – often by partnering with waste management companies that specialise in recycling. These are usually medium to long-term contracts with specific waste management companies, creating stable returns for investors.

Just last month, a multi-million pound waste management contract was agreed in Greater Manchester – a deal keenly followed by waste management investors as a sign of things to come.

Nigel Aitchison, who was recently recruited by Foresight, the venture capitalists, to address growing investor demand in the sector, says it is a “timely place” to be investing.

He believes that, after years of talk but not much action, there now exists both an economic stimulus for waste management companies – provided by the growing landfill tax – and a favourable social and political climate where everyone is keen to recycle.

One waste management company, New Earth Solutions, has set up a private fund for retail investors to take a direct stake. Since launching in July last year, the fund has raised £10m.

Investors own a share of each plant owned by New Earth – currently there are just three, but there are expected to be up to 30
in the next three years. Impax, the renewable energy investment specialists, believes New Earth has a compelling investment case.

“The UK is basically awful at doing recycling – we chuck everything in landfill,” says Jonathan Fogg at Impax Asset Management. “Landfill tax makes facilities like New Earth very cost-effective.”

He adds: “In this climate, they’re very defensive businesses, as most are supported by long-term contracts with local authorities.”

He estimates that £6bn-£7bn will be spent on recycling plants in the next 10 years in the UK to meet landfill recycling targets.

However, not all areas of waste management are recession-proof. Many smaller companies have been hit by funding problems, while the lower oil price is thought to have affected the market in recycling plastics. A slowdown in construction and a lower price for recycled steel has also taken its toll.

But investment managers believe the tide is turning. Charlie Thomas, manager of Jupiter’s Ecology fund, says that the problem of funding for smaller waste companies is “beginning to ease”.

He adds: “Some of the smaller names are trading 20-30 per cent below where they were 12 months ago and the fundamentals are getting better every day because their services are becoming more competitive as the landfill tax goes up.”

Fogg argues that while the oil price has affected plastics, it is “completely irrelevant for the vast majority of municipal and green waste”.

Companies can turn such waste into compost, either for use on agricultural land or in projects such as golf courses.

How to invest in waste management

Evironmental investment trusts, which include waste management stocks, are getting the thumbs up from analysts, writes Alice Ross.

Analysts at Oriel Securities say investors should take advantage of short-term negative sentiment to buy both Jupiter Green Invest-
ment Trust and Impax Environmental, arguing that the fall in the oil price is priced into the shares. “We see scope for a rerating of the global green universe as the market takes account of the swathes of new green legislation to be introduced over the next few years,” they say in a recent note.

Another option is investing through a venture capital trust. Venture capital managers say that they are well placed to fill the funding gap for smaller waste companies left by banks that are still unwilling to lend.

“We’ve seen no drop in appetite for our investment,” says Steve Read at Climate Change Capital. “Many developers we work with can’t raise as much bank finance as they were able to, so have been taking bigger investments from VCT people.”

The Ventus VCTs, run by CCC, invest in areas such as landfill gas projects and waste wood biomass generators. They target returns of 15 per cent and aim to pay shareholders an 8p annual dividend. Other VCTs focusing on the sector include those from Foresight and Oxford Capital Partners.

The New Earth Solutions Recycling Fund invests purely in NES, the private waste management company. It offers investors an annual return of 12 to 15 per cent and since its launch in July has returned just over 12 per cent. The fund is quoted on the Channel Islands stock exchange and can be purchased through a self-
invested personal pension (Sipp) or offshore bond.