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Biffa - still brass in muck

By Chris Bailey | Wednesday 13 June 2018

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

As the old saying goes, 'where there's muck there's brass'. Rubbish and recycling company Biffa (BIFF) shareholders have had an alright ride since the company came back to the market in late 2016 but today's update contains the fascinating assertion that the company's CEO Ian Wakelin has 'advised the Board that he no longer wants to hold a full time executive role and that he therefore intends to leave the Company once the Board's succession plan has been implemented'.

This sounds to me as if he realises there is more to life than co-ordinating rubbish collections and recycling initiatives. No doubt getting the company to market and trading in an alright fashion had its own rewards too...and they were not...rubbish. Still life goes on and continuation abounds with the CFO stepping up shortly once his own replacement has been found. And he has inherited a good backdrop.

The company's full year shows net revenue growth of 8.8% split neatly between organic at 4.4% and acquisitions at 4.4%. Meanwhile underlying operating profit rose 10.0%, balance sheet leverage remained under control, the free cash flow yield was over 6% and the dividend was nearly tripled to offer shareholders not far off a 3% yield today. No shocker.

The key to Biffa's business remains its industrial operations, be it collecting industrial waste or disposing/creating energy off it aided by a bunch of regulation that is only getting tighter. That's why it sees a solid outlook including various tuck-in acquisitions of industry peers who struggle to adapt to the evolving regulatory backdrop. Of course your local bin operations do play a role (20% of revenues) but this area is known for its high level of competition and suppressed margins and fortunately only accounts for 20% of the overall business.

Good to see Biffa talking about a 'disciplined approach to capital allocation and tendering' even if revenue is likely to consequently fall mid single digit in 2019 year-on-year. The only recent operational curve ball has been China's recent refusal to accept all our rubbish has - via the laws of supply and demand - dumped recycling related prices shorter-term and hit the profitability of the recycling operations. Profits in this division (12% of revenues) will still be impacted in the upcoming period as price recoveries are a little more into the future and despite the company coming up with the impressive statistic that 'Biffa recycles 780 million plastic bottles a year'. And that's unfortunately a growth market.

So to put it all another way, two-thirds of the business is humming along and a third is patchy/down and the waste-into-energy and plastic recycling initiatives remain interesting call options. Smell the scope for 5% growth then over the next year with a good acquisition input into this and a return to 5-10% growth after this. Not exciting...but better than most utilities out there.

At just over x10 EV/ebit, Biffa is not an expensive stock...but I agree it is not exciting. There is still brass in muck though - even if today's is more of a plastic vintage. Utility holding yield munchers take note - you can do so much better from a total return perspective with this one. Three quid before two quid again prospectively for the shares? Not a rubbish idea at all... I am a buyer here.

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