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Will Morrisons or Biffa be the first to a three quid share price?

By Chris Bailey | Thursday 13 September 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.


We all invest in shares for a variety of reasons but right up there - let's face it - is a desire to enhance our wealth. I was thinking about this in the context of two names that have updated the market today - and fascinatingly both have share prices that have moved between 200p and 260/270p during the last year. So the question to me is - with my limited pool of capital - which one is going to go to three quid first?

The first is Morrisons (MRW), where a corporate renaissance has been taking place in recent years supplemented by the late April announcement of a merger between Sainsbury's (SBRY) and Asda which I described as being sector transforming, even with 'the Germans' continuing to expand. Since then the sector bears have been squeezed further and Morrisons shares are kicking around levels last seen in late 2013. Today's numbers have confirmed continued progress with a tenth successive quarter of like-for-like growth (a cool 4.9% over the full half year period being reported on today). Throw in comments about the link-ups with luminaries such as Amazon and Ocado (OCDO) and the faster-than-expected development of the wholesale business and you can start putting together a story.

Net debt sliding further below a billion quid and the payment of a special dividend (further entrenching the stock as a 3%+ yielder) also are playing to the crowd. In short it is a touch more than PR spin when the company states 'We are confident that Morrisons has many meaningful and sustainable sales and profit growth opportunities ahead. We also expect free cash flow generation to remain strong and sustainable'. So what price getting on for £500 million of operating profit and a not too dis-similar free cash flow number? Well a punchy mid single digit free cash flow yield and a low/mid teens EV/ebit multiple highlight there is no need to panic out of the shares. It should be a three quid share over time...but maybe not this year or next year, unless sector consolidation goes to the next level. Grinding it out...

The other name is the waste/recycling company Biffa (BIFF), which I last wrote about three months ago - concluding that there is still 'brass in muck'. Today's short trading update keeps on ticking the boxes. The Industrial and Commercial division 'has continued to deliver good organic and acquisitive revenue growth'. With tighter and tighter regulation, the way a company gets rid of its waste is ever more structured and this is oligopolising the sector, to the benefit of names such as Biffa. Certainly keeping on doing fill-in acquisitions at sub x1 revenues makes sense for it many more times than they do not.

The issue for Biffa has been more the recycling division. At the link above I noted the impact of lower prices due to China refusing to take our waste - among other matters - and clearly this part of the business is not rocking, but comments today that 'recycled paper markets have continued to gradually stabilise, with some evidence of price recovery, whilst the steps being taken to ensure that product quality is maximised and cost headwinds are mitigated are being delivered as expected' are no disaster. The bins business also remains competitive but overall my gut feel is to reiterate what I concluded last time (at only a slightly lower share price than today's):

'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'.

So my winner to three quid first would be...Biffa.


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