You may recall back in September I rhapsodised about waste company Biffa (BIFF) observing - after pacing through its capital markets day presentation - that 'the company is exposed to themes such as tighter regulation, recycling and participation in energy from waste'. A quick look at the shares over the last nine months showed that my hopes of a three quid share price proved correct. Having done all the difficult work, I really should have got back in the stock after it nearly halved at the time of the March lows. Anyhow, here we are in June with the share having regained about half the decline and a full year numbers update is really in two parts – as are so many corporations reporting up to 31st March…
For the formal period under review, Biffa made good progress with revenue up 7% and underlying profit before tax up 12%. And, on a divisional basis, the company noted 'strong Industrial & Commercial (I&C) and Specialist Services revenue and profit performance...further progress across Recycling activities...and Inerts, Organics, Municipal and Landfill Gas all solid'. All good stuff. However, a group with industrial exposures cannot escape the challenges of the coronavirus, observing that its 'I&C and landfill businesses (were) most severely impacted with revenues initially down around 50% and since beginning to recover to 40% down'. And with these divisions between them around 80% of total revenues, that is not a small impact. Therefore no surprises to see that Biffa has already announced a suspension of the final dividend, the enactment of various cost cuts / use of government schemes and an end to the 'roll up' M&A policy initiatives that were part of its strategy.
I see those areas bouncing back though. There is naturally more of a cyclical impact in the I&C division as you can see by the names of some of the key customers mentioned in the update (Transport for London, Barratt Homes, Center Parcs, John Lewis Partnership, B&Q, Greene King and Mitchells & Butlers) but that can cut both ways. Meantime, the other aspects of the company's business I believe are set fair as those longer-term trends kick back in. How about the balance sheet? We have IFRS 16 accounting to largely thank for the net debt to ebitda rate now pushing x2.4. Something to watch, but historically - and I believe prospectively - this is a cash generative business (certainly the numbers to 31st March were strikingly strong on this front). I think it is highly likely that its self-imposed M&A prohibition largely remains for a while longer and it works with what it has got and chivvies the debt down over the next year or three. Meantime liquidity headroom (£150 million) looks fine and there are all the usual comments about the banks being helpful and related.
In short, I am still of the view that this is a business that - in a couple of years time - will generate underlying operating profit of around £100 million, is inherently cash generative and now has an EV of just over £1 billion. My three quid target comes from putting that profit flow on a barely low teens multiple. You can certainly debate what that should be in today's and tomorrow's world but some of those mega themes - in my opinion - are not going away. So long as Biffa keeps disciplined - and prospectively chivving down that debt - there will be brass in muck (again). One I am looking to buy (again).
Filed under: Biffa, Lookers, Tom Winnifrith, Bearcast, Powerhouse Energy, Amigo, Chris Bailey
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